<PAGE> 1
As filed with the Securities and Exchange Commission August 1, 1997
Registration No. 333-26699
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
Amendment No. 3 To
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EAST RIDGE BANCSHARES, INC.
(exact name of registrant as specified in its charter)
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Tennessee 6021 62-1175427
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation or organization) Classification Code Number)
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James D. Renegar, President
East Ridge Bancshares, Inc.
4154 Ringgold Road 4154 Ringgold Road
Chattanooga, TN 37412-0146 Chattanooga, TN 37412-0416
(423) 698-2454 (423) 698-2454
(Address, including zip code, and telephone number, (Name, address, including zip code, and telephone number,
including area code, of registrant's principal executive office) including area code, of agent for service)
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Kathryn R. Edge Timothy L. Hobbs, President Linda M. Crouch
Miller & Martin Cornerstone Community Bank Baker, Donelson, Bearman &
Suite 2325, SunTrust Center 5319 Highway 153 Caldwell, P.C.
424 Church Street Chattanooga, TN 37343 165 Madison Avenue
Nashville, TN 37219 (423) 877-8181 Memphis, TN 38103
(615) 244-3119 (901) 577-2262
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Approximate date of commencement of proposed sale of securities to public:
As soon as practicable after the effective date of this Registration Statement.
---------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. /X/
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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EAST RIDGE BANCSHARES, INC.
Cross Reference Sheet pursuant to Rule 404(a) of the Securities Act of
1933 and Item 501(b) of Regulation S-K showing the location or heading in the
Joint Proxy Statement/Prospectus of the information required by Part I of Form
S- 4.
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Location or Heading in
S-4 Item Number and Caption Joint Proxy Statement/Prospectus
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus . . . . . . . . . Facing Page; Cross Reference Sheet; Outside Front Cover
Page of Joint Proxy Statement/Prospectus.
2. Inside Front and Outside Back Cover
Pages of Prospectus . . . . . . . . . . . . . . Available Information; Inside Front Cover Page of Joint
Proxy Statement/Prospectus; Table of Contents.
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information . . . . . . . . . Summary; Pro Forma Financial Information; Risk Factors;
Information Concerning East Ridge; Information Concerning
Cornerstone; Financial Statements of East Ridge
Bancshares, Inc. and Subsidiary; and Financial
Statements of Cornerstone Community Bank.
4. Terms of the Transaction . . . . . . . . . . . . Summary; The Merger; The Merger Agreement; Certain
Federal Income Tax Consequences; Description of East
Ridge Capital Stock; Comparison of Certain Rights of
Shareholders.
5. Pro Forma Financial Information . . . . . . . . . Summary; Pro Forma Financial Information.
6. Material Contacts with the Company Being
Acquired . . . . . . . . . . . . . . . . . . . Not applicable.
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters . . . . . . . . . . . Not applicable.
8. Interests of Named Experts and Counsel . . . . . Experts.
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . . . Not applicable.
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants . . . Not applicable.
11. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . . . Not applicable.
12. Information with Respect to S-2 or S-3
Registrant . . . . . . . . . . . . . . . . . . Not applicable.
13. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . . . Not applicable.
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14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants . . . . . . . Summary; The Merger; Information Concerning East Ridge;
East Ridge's Management's Discussion and Analysis of
Financial Condition and Results of Operations; Management
of East Ridge; Description of East Ridge Common Stock;
Financial Statements of East Ridge Bancshares,
Inc. and Subsidiary.
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies . . . . Not applicable.
16. Information with Respect to S-2 or S-3
Company . . . . . . . . . . . . . . . . . . . . Not applicable
17. Information with Respect to Companies
Other Than S-2 or S-3 Companies . . . . . . . . Summary; The Merger; Information Concerning Cornerstone;
Cornerstone's Management's Discussion and Analysis of
Financial Condition and Results of Operation; Management
of Cornerstone; Description of Cornerstone Capital Stock;
Financial Statements of Cornerstone Community
Bank.
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Comments or
Authorizations are to be Solicited or
in an Exchange Offer . . . . . . . . . . . . . Summary; The Meetings; The Merger, Cover Page of the
Joint Proxy Statement/Prospectus; Election of Directors
of East Ridge; Election of Directors of Cornerstone
19. Information if Proxies, Comments or
Authorizations are not to be Solicited or
in an Exchange Offer . . . . . . . . . . . . . Not applicable.
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EAST RIDGE BANCSHARES, INC.
4154 Ringgold Road
Chattanooga, Tennessee 37412-0416
August 5, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of East Ridge Bancshares, Inc. ("East Ridge"), which will be held on Thursday
August 21, 1997, at 4154 Ringgold Road, Chattanooga, Tennessee 37412 at 7:00
p.m., Eastern Daylight Savings Time (the "East Ridge Meeting").
At this meeting, you will be asked to consider and vote upon a
proposed merger (the "Merger") involving East Ridge, The Bank of East Ridge,
the wholly-owned subsidiary of East Ridge ("Bank of East Ridge"), and
Cornerstone Community Bank ("Cornerstone"), pursuant to which Cornerstone will
be merged with and into Bank of East Ridge. Upon the Merger, Bank of East
Ridge, as a wholly-owned subsidiary of East Ridge, will be the surviving
company and will change its name to "Cornerstone Community Bank," and East
Ridge will amend its charter and change its name to "Cornerstone Bancshares,
Inc." ("New Cornerstone"). Shareholders of East Ridge may elect to receive
cash and/or newly issued shares of common stock of New Cornerstone ("New
Cornerstone Common Stock"). The proposed Merger is more fully described in
the accompanying Joint Proxy Statement/Prospectus.
The Merger Agreement provides that shareholders of East Ridge who do
not exercise dissenters' rights may elect to receive New Cornerstone Common
Stock and/or cash for their shares of East Ridge common stock. The number of
shares of New Cornerstone Common Stock received in exchange for East Ridge
Common Stock will be based on an exchange ratio determined by multiplying the
number of shares of East Ridge Common Stock to be exchanged by $56.1772 and
then dividing by $12 (the "ERB Exchange Ratio"). Shareholders of East Ridge
who exchange their shares for cash will receive $56.1772 per share.
Accordingly, each share of East Ridge Common Stock will be converted into the
right to receive 4.6814 shares of New Cornerstone Common Stock. However, the
aggregate amount of cash to be delivered to the shareholders of East Ridge will
not exceed $4,287,500. To the extent shareholders of East Ridge elect to
receive in the aggregate more than $4,287,500, cash will be paid on a pro-rata
basis to those East Ridge shareholders electing to receive cash. With respect
to New Cornerstone Common Stock received in the transaction by East Ridge
shareholders, the Merger Agreement provides for a tax-free exchange.
The Merger Agreement provides that shareholders of Cornerstone who do
not exercise dissenters' rights will exchange each share of Cornerstone common
stock and each warrant currently held for one share of New Cornerstone Common
Stock and one warrant to purchase one share of New Cornerstone Common Stock for
$12 per share if exercised by February 8, 1998 and for $15 per share if
exercised by February 8, 2001 (the "Cornerstone Exchange Ratio").
The Merger will result in a change of control of the ownership and
management of East Ridge. Upon completion of the Merger, Cornerstone
shareholders will own a minimum of 79.4% of the outstanding shares of New
Cornerstone Common Stock and the officers and directors of Cornerstone will
continue as the officers and directors of New Cornerstone.
The Board of Directors of East Ridge believes that the transactions
contemplated by the Agreement and Plan of Merger are fair to and in the best
interests of East Ridge and its shareholders. The Boards of Directors of both
East Ridge and Cornerstone have approved the Agreement and Plan of Merger and
the Board of Directors of East Ridge recommends that you vote FOR approval of
the Agreement and Plan of Merger. All shareholders are invited to attend the
East Ridge Meeting in person. Approval of the Merger requires the affirmative
vote of a majority of the outstanding shares of common stock of East Ridge.
David E. Young, a director of East Ridge and Chairman of the Board of Bank of
East Ridge, beneficially owns 76,139 shares of East Ridge Common Stock, or
approximately 69.8% of the outstanding East Ridge Common Stock. Mr. Young has
agreed to vote all of his shares in favor of the Merger. Accordingly, approval
of the Merger Agreement by the East Ridge shareholders is assured.
At the East Ridge Meeting shareholders of East Ridge will also elect
six directors to serve as members of the Board of Directors of East Ridge until
the next annual meeting or until their successors are duly elected and
qualified.
The enclosed Notice of Annual Meeting of Shareholders and Joint Proxy
Statement/Prospectus explain the Merger and provide specific information
relative to the East Ridge Meeting. Please carefully read these materials and
thoughtfully consider the information contained in them.
In order that your shares may be represented at the East Ridge
Meeting, you are urged promptly to complete, sign, date and return the
accompanying Proxy in the enclosed envelope, whether or not you plan to attend
the East Ridge Meeting. If you attend the
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East Ridge Meeting in person, you may, if you wish, vote personally on
all matters brought before the East Ridge Meeting even if you have
previously returned your Proxy.
Sincerely,
James D. Renegar
President
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CORNERSTONE COMMUNITY BANK
5319 Highway 153
Chattanooga, Tennessee 37412-0416
August 5, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of Cornerstone Community Bank ("Cornerstone"), which will be held on Thursday
August 21, 1997, at 5319 Highway 153, Chattanooga, Tennessee 37343 at 7:00 p.m.
Eastern Daylight Savings Time (the "Cornerstone Meeting").
At this meeting, you will be asked to consider and vote upon a
proposed merger (the "Merger") involving East Ridge Bancshares, Inc. ("East
Ridge"), The Bank of East Ridge, the wholly-owned subsidiary of East Ridge
("Bank of East Ridge"), and Cornerstone, pursuant to which Cornerstone will be
merged with and into Bank of East Ridge. Upon the Merger, Bank of East Ridge,
as a wholly-owned subsidiary of East Ridge, will be the surviving company and
will change its name to "Cornerstone Community Bank," and East Ridge will amend
its charter and change its name to "Cornerstone Bancshares, Inc." ("New
Cornerstone"). The proposed Merger is more fully described in the accompanying
Joint Proxy Statement/Prospectus.
The Merger Agreement provides that shareholders of Cornerstone who do
not exercise dissenters' rights will exchange each share of Cornerstone Common
Stock and each warrant currently held for one share of common stock of New
Cornerstone ("New Cornerstone Common Stock") and one warrant to purchase one
share of New Cornerstone Common Stock for $12 per share if exercised by
February 8, 1998 and for $15 per share if exercised by February 8, 2001 (the
"Cornerstone Exchange Ratio"). The Merger will result in a change of control
of the ownership and management of East Ridge. Upon completion of the Merger,
Cornerstone shareholders will own a minimum of 79.4% of the outstanding shares
of New Cornerstone Common Stock and the officers and directors of Cornerstone
will continue as the officers and directors of New Cornerstone. With respect
to shares of New Cornerstone Common Stock received in the exchange, the Merger
Agreement provides for a tax-free exchange.
The Merger Agreement provides that shareholders of East Ridge who do
not exercise dissenters' rights may elect to receive New Cornerstone Common
Stock and/or cash for their shares of East Ridge common stock. The number of
shares of New Cornerstone Common Stock received in exchange for East Ridge
Common Stock will be based on an exchange ratio determined by multiplying the
number of shares of East Ridge Common Stock to be exchanged by $56.1772 and
then dividing by $12 (the "ERB Exchange Ratio"). Shareholders of East Ridge
who exchange their shares for cash will receive $56.1772 per share.
Accordingly, each share of East Ridge Common Stock will be converted into the
right to receive 4.6814 shares of New Cornerstone Common Stock. However, the
aggregate amount of cash to be delivered to the shareholders of East Ridge will
not exceed $4,287,500. To the extent shareholders of East Ridge elect to
receive in the aggregate more than $4,287,500, cash will be paid on a pro-rata
basis to those East Ridge shareholders electing to receive cash.
The Board of Directors of Cornerstone believes that the Merger and the
Agreement and Plan of Merger are fair to, and in the best interests of,
Cornerstone and its shareholders. The Boards of Directors of both East Ridge
and Cornerstone have approved the Agreement and Plan of Merger, and the Board
of Directors of Cornerstone recommends that you vote FOR approval of the
Merger. All shareholders are invited to attend the Cornerstone Meeting in
person. Approval of the Merger requires the affirmative vote of the holders of
a majority of the outstanding shares of Cornerstone common stock.
At the Cornerstone Meeting, shareholders will also (i) elect 15
directors to serve as members of the Board of Directors of Cornerstone until
the next annual meeting or until their successors are duly elected and
qualified; (ii) amend the Charter of Cornerstone to authorize the exercise of
trust powers; and (iii) ratify the appointment of auditors.
The enclosed Notice of Annual Meeting of Shareholders and Joint Proxy
Statement/Prospectus explain the Merger and provide specific information
relative to the Cornerstone Meeting. Please carefully read these materials and
thoughtfully consider the information contained in them. Your vote is of great
importance, as the approval of Cornerstone shareholders is required to
consummate the Merger.
In order that your shares may be represented at the Cornerstone
Meeting, you are urged promptly to complete, sign, date and return the
accompanying Proxy in the enclosed envelope, whether or not you plan to attend
the Cornerstone Meeting even if you have previously returned your Proxy.
Sincerely,
Timothy L. Hobbs
President
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EAST RIDGE BANCSHARES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on August 21, 1997
NOTICE IS HEREBY GIVEN that an Annual Meeting of Shareholders of East
Ridge Bancshares, Inc. ("East Ridge") will be held on Thursday, August 21, 1997
at 4154 Ringgold Road, Chattanooga, Tennessee 37412 at 7:00 p.m., Eastern
Daylight Savings Time, for the following purposes:
1. To consider and vote upon the approval and adoption of an
Agreement and Plan of Merger dated as of March 18, 1997 (the "Merger
Agreement") among East Ridge, The Bank of East Ridge ("Bank of East Ridge"),
Cornerstone Community Bank ("Cornerstone") and David E. Young, individually, a
copy of which is set forth as Appendix A to the attached Joint Proxy
Statement/Prospectus. The Merger Agreement provides for, among other things,
the proposed merger of Cornerstone (the "Merger") with and into Bank of East
Ridge, a Tennessee banking corporation that is a wholly-owned subsidiary of
East Ridge, with Bank of East Ridge to be the surviving corporation in the
Merger, but which, upon the effectiveness of the Merger, will amend its charter
and change its name to "Cornerstone Community Bank"; and East Ridge will amend
its charter and change its name to "Cornerstone Bancshares, Inc.";
2. To elect six directors to serve as members of the Board of
Directors of East Ridge until the next annual meeting or until their successors
are duly elected and qualified; and
3. To transact such other business as may properly come before
the meeting.
The foregoing items of business are more fully described in the Joint
Proxy Statement/Prospectus accompanying this Notice.
Only shareholders of record at the close of business on July 27, 1997
are entitled to notice of, and to vote at, the meeting and any adjournments
thereof.
Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of East Ridge common stock.
Election of each of the nominees for director requires the affirmative vote of
the holders of a plurality of the votes cast at the meeting.
The Board of Directors of East Ridge recommends that shareholders vote
to approve the Merger Agreement and vote for the election of the nominees for
directors.
BY ORDER OF THE BOARD OF DIRECTORS
Secretary
Chattanooga, Tennessee
August 5, 1997
To ensure your representation at the meeting, you are urged to mark, sign,
date and return the enclosed proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. To revoke a proxy, you
must submit to the Secretary of East Ridge, prior to voting, either a signed
instrument of revocation or a duly executed proxy bearing a date or time
later than the proxy being revoked. If you attend the meeting, you may vote
in person even if you previously returned a proxy.
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CORNERSTONE COMMUNITY BANK
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on August 21, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Cornerstone Community Bank ("Cornerstone") will be held on Thursday, August 21,
1997 at 5319 Highway 153, Chattanooga, Tennessee 37343 at 7:00 p.m., Eastern
Daylight Savings Time (the "Cornerstone Meeting"), for the following purposes:
1. To consider and vote upon the approval and adoption of an
Agreement and Plan of Merger dated as of March 18, 1997 (the "Merger
Agreement") among East Ridge, The Bank of East Ridge ("Bank of East Ridge"),
Cornerstone Community Bank ("Cornerstone") and David E. Young, individually, a
copy of which is set forth as Appendix A to the attached Joint Proxy
Statement/Prospectus. The Merger Agreement provides for, among other things,
the proposed merger of Cornerstone (the "Merger") with and into Bank of East
Ridge, a Tennessee banking corporation that is a wholly-owned subsidiary of
East Ridge, with Bank of East Ridge to be the surviving corporation in the
Merger, but which, upon the effectiveness of the Merger, will amend its charter
and change its name to "Cornerstone Community Bank"; and East Ridge will amend
its charter and change its name to "Cornerstone Bancshares, Inc.";
2. To elect 15 directors to serve as members of the Board of
Directors of Cornerstone until the next annual meeting or until their
successors are duly elected and qualified;
3. To amend the Charter of Cornerstone to authorize the exercise
of trust powers, subject to regulatory approval;
4. To ratify the appointment of auditors; and
5. To transact such other business as may properly come before
the meeting.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on July 29, 1997
are entitled to notice of, and to vote at, the meeting and any adjournments
thereof.
Approval of the Merger Agreement and the amendment of the Charter
requires the affirmative vote of the holders of a majority of the outstanding
shares of Cornerstone Common Stock. Election of each of the nominees for
director requires the affirmative vote of the holders of a plurality of the
votes cast at the meeting. Ratification of the appointment of auditors
requires that votes cast in favor of the proposal must exceed the votes cast in
opposition to it.
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The Board of Directors of Cornerstone recommends that shareholders
vote to approve the Merger Agreement and vote for the election of the nominees
for director, the amendment of the Charter and the appointment of auditors.
BY ORDER OF THE BOARD OF DIRECTORS
Chattanooga, Tennessee
August 5, 1997
Secretary
YOUR VOTE IS IMPORTANT
To ensure your representation at the meeting, you are urged to mark, sign,
date and return the enclosed proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. To revoke a proxy, you
must submit to the Secretary of Cornerstone, prior to voting, either a signed
instrument of revocation or a duly executed proxy bearing a date or time
later than the proxy being revoked. If you attend the meeting, you may vote
in person even if you previously returned a proxy.
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TABLE OF CONTENTS
AVAILABLE INFORMATION................................................. -3-
SUMMARY............................................................... -4-
The Companies......................................................... -4-
Annual Meetings of Shareholders....................................... -4-
Terms of the Merger................................................... -5-
Election of Form of Merger Consideration.............................. -6-
Advantages and Disadvantages of Merger Consideration.................. -6-
Effective Time........................................................ -6-
Reasons for the Merger; Recommendation of Boards of Directors......... -6-
Opinion of Financial Adviser.......................................... -6-
Conditions; Regulatory Approvals...................................... -6-
Termination of the Merger Agreement................................... -7-
Management After the Merger........................................... -7-
Interests of Certain Persons in the Merger............................ -7-
Certain Differences in Shareholders' Rights........................... -7-
Dissenters' Rights.................................................... -8-
Certain Federal Income Tax Consequences............................... -8-
Accounting Treatment.................................................. -8-
Market Prices of Common Stock......................................... -9-
Equivalent and Pro Forma Share Data................................... -9-
Selected Financial Data and Ratios (Unaudited)........................ -10-
RISK FACTORS.......................................................... -12-
Absence of Existing Public Market; Market Prices...................... -12-
Ability of New Cornerstone to Execute Its Business Strategy........... -12-
Interest Rate Risk.................................................... -12-
Economic Conditions and Geographic Concentration...................... -12-
Government Regulations and Monetary Policy............................ -12-
Competition........................................................... -13-
Dependence on Key Personnel........................................... -13-
Credit Quality........................................................ -13-
Anti-takeover Provisions.............................................. -13-
Future Financing Needs................................................ -13-
THE ANNUAL MEETINGS................................................... -14-
Meetings of Shareholders.............................................. -14-
Purpose of Meetings................................................... -14-
Voting Requirements at Meetings....................................... -14-
Proxies............................................................... -15-
PROPOSAL 1. THE MERGER................................................ -16-
Background of and Reasons for the Merger.............................. -16-
Opinion of Cornerstone Financial Adviser.............................. -19-
Terms of the Merger................................................... -24-
Election of Form of Merger Consideration.............................. -24-
Advantages and Disadvantages of Merger Consideration.................. -24-
Effective Time........................................................ -25-
Surrender of Certificates............................................. -25-
Conditions to Consummation of the Merger.............................. -26-
Conduct of Business Pending Merger.................................... -27-
Regulatory Approvals.................................................. -28-
No Solicitation....................................................... -28-
Waiver; Amendment; Termination........................................ -28-
Management After the Merger........................................... -29-
Interests of Certain Persons in the Merger............................ -29-
Dissenters' Rights.................................................... -29-
Certain Federal Income Tax Consequences............................... -32-
Accounting Treatment.................................................. -34-
Expenses.............................................................. -34-
PROPOSAL 2. ELECTION OF DIRECTORS..................................... -34-
East Ridge............................................................ -34-
Cornerstone........................................................... -34-
PROPOSAL 3. AMENDMENT OF THE CHARTER OF CORNERSTONE................... -35-
PROPOSAL 4. RATIFICATION OF THE APPOINTMENT OF AUDITORS OF
CORNERSTONE........................................................... -35-
INFORMATION CONCERNING EAST RIDGE..................................... -36-
Selected Financial Data for East Ridge................................ -36-
EAST RIDGE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................... -37-
General............................................................... -37-
Summary............................................................... -37-
Financial Condition................................................... -37-
Balance Sheet Management.............................................. -38-
Results of Operations................................................. -38-
Effects of Inflation and Changing Prices.............................. -41-
Net Interest Income................................................... -42-
Liability and Asset Management........................................ -43-
Deposits.............................................................. -44-
Assets................................................................ -45-
Investment Portfolio.................................................. -45-
Investment Policy..................................................... -47-
Loan Portfolio........................................................ -48-
Loan Policy........................................................... -49-
Credit Risk Management and Reserve for Loan Losses.................... -50-
Capital Resources/Liquidity........................................... -51-
Capital Adequacy...................................................... -52-
BUSINESS OF EAST RIDGE................................................ -54-
General............................................................... -54-
Employees............................................................. -54-
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Customers............................................................ -54-
Properties........................................................... -54-
Legal Proceedings.................................................... -54-
Banking.............................................................. -54-
Competition.......................................................... -54-
Supervision and Regulation........................................... -55-
Effect of Governmental Policies...................................... -56-
MANAGEMENT OF EAST RIDGE............................................. -57-
Directors and Executive Officers..................................... -57-
Transactions with Management......................................... -57-
Securities Law Limitations........................................... -58-
The East Ridge Board and its Committees.............................. -58-
Executive Compensation............................................... -58-
Compensation of Directors............................................ -58-
Ownership of East Ridge Common Stock................................. -58-
DESCRIPTION OF EAST RIDGE COMMON STOCK............................... -59-
INFORMATION CONCERNING CORNERSTONE................................... -60-
Selected Financial Data for Cornerstone.............................. -60-
CORNERSTONE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. -61-
General.............................................................. -61-
Results of Operations -- 3 months ended March 31, 1997............... -61-
Results of Operations -- From Inception (January 23, 1996)
through December 31, 1996........................................ -61-
Net Interest Income.................................................. -61-
Liability and Asset Management....................................... -62-
Deposits............................................................. -64-
Assets............................................................... -65-
Investment Portfolio................................................. -65-
Investment Policy.................................................... -66-
Loan Portfolio....................................................... -66-
Loan Policy.......................................................... -67-
Credit Risk Management and Reserve for Loan Losses................... -68-
Capital Resources/Liquidity.......................................... -69-
Capital Adequacy..................................................... -69-
BUSINESS OF CORNERSTONE.............................................. -71-
General.............................................................. -71-
Employees............................................................ -71-
Customers............................................................ -71-
Properties........................................................... -71-
Legal Proceedings.................................................... -71-
Competition.......................................................... -71-
Supervision and Regulation........................................... -71-
Effect of Governmental Policies...................................... -72-
MANAGEMENT OF CORNERSTONE............................................ -73-
Directors and Executive Officers..................................... -73-
Transactions with Management......................................... -74-
The Cornerstone Board and its Committees............................. -74-
Executive Compensation............................................... -74-
Compensation of Directors............................................ -75-
Ownership of Cornerstone Common Stock................................ -75-
DESCRIPTION OF CORNERSTONE CAPITAL STOCK............................. -76-
Common Stock......................................................... -76-
Preferred Stock...................................................... -76-
Warrants............................................................. -76-
Control-Share Acquisition Provisions................................. -77-
Indemnification of Directors and Officers............................ -78-
Securities Law Limitations........................................... -78-
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS....................... -78-
Removal of Directors................................................. -78-
Conflict-of-Interest Transactions.................................... -79-
Meetings of Shareholders............................................. -79-
Required Vote for Authorization of Certain Actions................... -79-
Action by Written Consent............................................ -80-
Inspection Rights.................................................... -80-
Amendment of Certificate of Incorporation or Charter and Bylaws...... -80-
Voluntary Dissolution................................................ -80-
Indemnification...................................................... -80-
Business Combination Statute......................................... -81-
Control Share Acquisition Act........................................ -81-
Investor Protection Act.............................................. -81-
Authorized Corporation Protection Act................................ -82-
Greenmail Act........................................................ -82-
Dividends and Other Distributions.................................... -83-
Dissenters' Rights................................................... -83-
VALIDITY OF COMMON STOCK............................................. -83-
EXPERTS.............................................................. -83-
INDEX TO FINANCIAL INFORMATION....................................... F-1
Pro Forma Financial Information...................................... F-1
Financial Statements of East Ridge Bancshares, Inc. And Subsidiary... F-1
Financial Statements of Cornerstone Community Bank................... F-1
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JOINT PROXY STATEMENT/PROSPECTUS
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CORNERSTONE COMMUNITY BANK EAST RIDGE BANCSHARES, INC.
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 21, 1997 TO BE HELD ON AUGUST 21, 1997
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EAST RIDGE BANCSHARES, INC.
PROSPECTUS FOR 1,100,547 SHARES OF COMMON STOCK AND WARRANTS
TO PURCHASE 590,130 SHARES OF COMMON STOCK
This Joint Proxy Statement/Prospectus and the accompanying forms of
proxy are being furnished in connection with the solicitation of proxies by the
Boards of Directors of East Ridge Bancshares, Inc. ("East Ridge") and
Cornerstone Community Bank ("Cornerstone") to be used at the Annual Meeting of
Shareholders of East Ridge to be held on August 21, 1997 at 7:00 p.m., Eastern
Daylight Savings Time (the "East Ridge Meeting") and the Annual Meeting of
Shareholders of Cornerstone to be held on August 21, 1997 at 7:00 p.m., Eastern
Daylight Savings Time (the "Cornerstone Meeting", and together with the East
Ridge Meeting, the "Meetings"), in each case, at the main office of each in
Chattanooga, Tennessee. This Joint Proxy Statement/Prospectus and the
accompanying forms of proxy are first being mailed to shareholders of East
Ridge and Cornerstone on or about August 5, 1997.
At the Meetings, shareholders of each of East Ridge and Cornerstone
will consider and vote upon the approval and adoption of an Agreement and Plan
of Merger dated as of March 18, 1997 (the "Merger Agreement") among East Ridge,
The Bank of East Ridge ("Bank of East Ridge"), Cornerstone and David E. Young,
individually, a copy of which is set forth as Appendix A to the attached Joint
Proxy Statement/Prospectus. The Merger Agreement provides for, among other
things, the merger of Cornerstone with and into Bank of East Ridge, a Tennessee
banking corporation that is a wholly-owned subsidiary of East Ridge (the
"Merger"), with Bank of East Ridge to be the surviving corporation in the
Merger, but which, upon the effectiveness of the Merger, will amend its charter
and change its name to "Cornerstone Community Bank." Upon the effectiveness of
the Merger, East Ridge will amend its charter and change its name to
"Cornerstone Bancshares, Inc." ("New Cornerstone"). The Merger will result in a
change of control of the ownership and management of East Ridge. Upon
completion of the Merger, Cornerstone shareholders will own a minimum of 79.4%
of the outstanding shares of common stock of New Cornerstone ("New Cornerstone
Common Stock") and the officers and directors of Cornerstone will continue as
the officers and directors of Cornerstone.
Upon the effectiveness of the Merger (the "Effective Time"), each
share of East Ridge common stock ("East Ridge Common Stock") outstanding prior
to the Effective Time will be converted into a right to receive cash and/or New
Cornerstone Common Stock. Shareholders of East Ridge who do not exercise
dissenters' rights may elect to receive New Cornerstone Common Stock and/or
cash for their shares of East Ridge common stock. The number of shares of New
Cornerstone Common Stock received in exchange for East Ridge Common Stock will
be based on an exchange ratio determined by multiplying the number of shares of
East Ridge Common Stock to be exchanged by $56.1772 and then dividing by $12.00
(the "ERB Exchange Ratio"). Shareholders of East Ridge who exchange their
shares for cash will receive $56.1772 per share. Accordingly, each share of
East Ridge Common Stock will be converted into the right to receive 4.6814
shares of New Cornerstone Common Stock. However, the aggregate amount of cash
to be delivered to the shareholders of East Ridge will not exceed $4,287,500.
To the extent shareholders of East Ridge elect to receive in the aggregate more
than $4,287,500, cash will be paid on a pro-rata basis to those East Ridge
shareholders electing to receive cash. See "The Merger Agreement."
At the Effective Time, each share of Cornerstone common stock and each
warrant exercisable for Cornerstone common stock (unless the context requires
otherwise, the Cornerstone common stock and warrants are referred to
hereinafter collectively as "Cornerstone Common Stock") outstanding prior to
the Effective Time will be converted into a right to receive one share of New
Cornerstone Common Stock and a warrant to purchase one share of New Cornerstone
Common Stock for $12 per share if exercised by February 8, 1998 and for $15 per
share if exercised by February 8, 2001 ("New Cornerstone Warrant").
SEE "RISK FACTORS" ON PAGE 11 FOR A SUMMARY OF CERTAIN MATERIAL RISKS
AND CONSIDERATIONS RELATING TO AN INVESTMENT IN THE NEW CORNERSTONE COMMON
STOCK.
This Joint Proxy Statement/Prospectus also serves as a Prospectus under
the Securities Act of 1933, as amended (the "Securities Act"), relating to a
maximum of 1,100,547 shares of New Cornerstone Common Stock and New Cornerstone
Warrants exercisable for the purchase of up to 590,130 shares of New Cornerstone
Common Stock issuable in the Merger. Upon completion of the Merger, Cornerstone
shareholders will own a minimum of 79.4% of the New Cornerstone Common Stock.
There is no established trading market for either the East Ridge
Common Stock or the Cornerstone Common Stock. To management of East Ridge's
knowledge and management of Cornerstone's knowledge, the most recent
transactions with respect to the East Ridge Common Stock and the Cornerstone
Common Stock were $56.17 and $13.50, respectively. There will be no trading
market for the New Cornerstone Common Stock and New Cornerstone Warrants upon
their issuance.
At the Meetings, the shareholders of each of East Ridge and
Cornerstone also will be asked to elect nominees to serve on their respective
boards of directors until their respective successors are elected and
qualified. Additionally, shareholders of Cornerstone will be asked to approve
the amendment of its Charter to authorize the exercise of trust powers and to
ratify the appointment of auditors.
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THE SHARES OF NEW CORNERSTONE COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is August 1, 1997.
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Cornerstone and East Ridge have received an opinion of counsel that the
Merger will be a tax-free reorganization, within the meaning of Sections
368(a)(1)(A), 368(a)(2)(D), and 368(a)(1)(E) of the Internal Revenue Code of
1986, as amended (the "Code"), for holders of Cornerstone Common Stock and for
holders of East Ridge Common Stock to the extent of the stock consideration
received by the East Ridge shareholders and the Cornerstone shareholders in the
Merger. However, the exchange by the Cornerstone shareholders of Cornerstone
warrants for New Cornerstone Warrants may be a taxable transaction.
No person is authorized to give any information or to make any
representation other than those contained in this Joint Proxy
Statement/Prospectus, and if given or made, such information or representation
should not be relied upon as having been authorized. This Joint Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation of
an offer to purchase, the securities offered by this Joint Proxy
Statement/Prospectus, or the solicitation of a proxy, in any jurisdiction in
which such offer or solicitation may not lawfully be made. Neither the
delivery of this Joint Proxy Statement/Prospectus nor any distribution of
securities pursuant to this Joint Proxy Statement/Prospectus shall, under any
circumstances, create an implication that there has been no change in the
information set forth herein since the date of this Joint Proxy
Statement/Prospectus.
AVAILABLE INFORMATION
East Ridge has filed with the SEC a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act covering the securities
described herein. This Joint Proxy Statement/Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the SEC.
Statements contained herein or incorporated herein by reference concerning the
provisions of documents are summaries of such documents, and each statement is
qualified in its entirety by reference to the applicable document if filed with
the SEC or attached as an appendix hereto. For further information, reference
is hereby made to the Registration Statement and the exhibits filed therewith.
The Registration Statement and any amendments thereto, including exhibits filed
as a part thereof, are available for inspection and copying as set forth above.
New Cornerstone is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will file reports and other information with the SEC.
Such reports and other information when filed by New Cornerstone will be
available for copying and inspection at the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, as
well as at the following Regional Offices of the Commission, Seven World Trade
Center, New York, New York 10048; and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Such material will also be
accessible electronically by means of the SEC's home page on the Internet at
http://www.sec.gov.
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SUMMARY
The following is a summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus. Reference is made to, and this
summary is qualified in its entirety by, the more detailed information
contained elsewhere in this Joint Proxy Statement/Prospectus and in the
attached Appendices. Shareholders of East Ridge and Cornerstone are urged to
read carefully this Joint Proxy Statement/Prospectus and the attached
Appendices in their entirety.
All information concerning East Ridge included in this Joint Proxy
Statement/Prospectus and the attached Appendices has been furnished by East
Ridge and all information concerning Cornerstone included in this Joint Proxy
Statement/Prospectus and the attached Appendices has been furnished by
Cornerstone.
THE COMPANIES
East Ridge. East Ridge, incorporated in Tennessee in 1983, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. East Ridge's principal asset is the capital stock of Bank of East
Ridge, a state bank in operation for over 12 years with offices in Chattanooga,
Tennessee. At March 31, 1997, East Ridge had consolidated total assets of
$44.5 million and shareholders' equity of $3.1 million. East Ridge's
principal offices are located at 4154 Ringgold Road, Chattanooga, Tennessee
37412-0416 and its telephone number is (423) 698-2454.
Cornerstone. Cornerstone, a Tennessee banking corporation chartered
on January 23, 1996, began its operations in February 1996 at its office
located in Chattanooga, Tennessee. Cornerstone's primary deposit products are
demand deposits, savings accounts, and certificates of deposit. Its primary
lending products are commercial business loans, real estate loans, and
installment loans. At March 31, 1997, Cornerstone had total assets of
$36.3 million and stockholders' equity of $5.3 million. Cornerstone's
principal offices are located at 5319 Highway 153, Chattanooga, Tennessee
37343-2289 and its telephone number is (423) 877-8181.
David E. Young. David E. Young is a director of East Ridge and
Chairman of the Board of Bank of East Ridge. Additionally, Mr. Young
beneficially owns 76,139 shares, representing 69.8% of the outstanding shares
of East Ridge and has agreed to vote all such shares in favor of the Merger.
Accordingly, approval of the Merger Agreement by the shareholders of East Ridge
is assured.
ANNUAL MEETINGS OF SHAREHOLDERS
The East Ridge Meeting. The East Ridge Meeting will be held on Thursday
August 21, 1997, at 4154 Ringgold Road, Chattanooga, Tennessee 37412 at 7:00
pm., Eastern Daylight Savings Time. Only holders of ecord of East Ridge
Common Stock at the close of business on July 29, 1997 (the "East Ridge Record
Date") will be entitled to vote at the East Ridge Meeting. On the East Ridge
Record Date, there were issued and outstanding approximately 109,030 shares of
East Ridge Common Stock held by approximately 70 holders of record. Each such
share is entitled to one vote on each matter which comes up at the East Ridge
Meeting.
At the East Ridge Meeting, shareholders of East Ridge will be asked to
consider and vote upon a proposal to approve and adopt the Merger Agreement,
which provides for the merger of Cornerstone with and into Bank of East Ridge
with Bank of East Ridge being the surviving banking corporation and changing
its name to "Cornerstone Community Bank." The Merger will result in a change
of control of the ownership and management of East Ridge. Upon completion of
the Merger, Cornerstone shareholders will own a minimum of 79.4% of the
outstanding shares of New Cornerstone Common Stock and the officers and
directors of Cornerstone will continue as the officers and directors of
New Cornerstone. Upon consummation of the Merger, East Ridge will amend its
charter and change its name to "Cornerstone Bancshares, Inc." Approval of the
Merger Agreement requires the affirmative vote of a majority of the outstanding
shares of East Ridge.
At the East Ridge Meeting, shareholders will also elect six directors
to serve as members of the East Ridge Board of Directors until their successors
are elected and qualified. The election of each of the nominees requires the
affirmative vote of the holders of a plurality of the votes cast at the East
Ridge Meeting.
As of the East Ridge Record Date, directors and executive officers
of East Ridge owned beneficially an aggregate of 83,344 shares of East Ridge
Common Stock or approximately 76% of the shares of East Ridge Common Stock
outstanding on such date. Of such 83,344 shares, David E. Young, a director of
East Ridge and Chairman of the Board of Bank of East
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Ridge, beneficially owns 76,139 shares of East Ridge Common Stock, or
approximately 69.8% of the outstanding East Ridge Common Stock. Mr.Young has
agreed to vote all of his shares in favor of the Merger. Accordingly, approval
of the Merger Agreement by the East Ridge shareholders is assured.
The Cornerstone Meeting. The Cornerstone Meeting will be held on
Thursday, August 21, 1997, at 5319 Highway 153 Chattanooga, Tennessee 37343 at
7:00 p.m., Eastern Daylight Savings Time. Only holders of record of
Cornerstone Common Stock at the close of business on July 27, 1997 (the
"Cornerstone Record Date") will be entitled to vote at the Cornerstone Meeting.
On the Cornerstone Record Date, there were issued and outstanding approximately
590,130 shares of Cornerstone Common Stock held by approximately 400 holders of
record. Each share is entitled to one vote on each matter to come up at the
Cornerstone Meeting.
At the Cornerstone Meeting, shareholders of Cornerstone will be asked
to consider and vote upon a proposal to approve and adopt the Merger Agreement,
which provides for the merger of Cornerstone with and into Bank of East Ridge
with Bank of East Ridge being the surviving banking corporation and amending
its charter and changing its name to "Cornerstone Community Bank." Upon
consummation of the Merger, East Ridge will amend its charter and change its
name to "Cornerstone Bancshares, Inc." The Merger will result in a change of
control of the ownership and management of East Ridge. Upon completion of the
Merger, Cornerstone shareholders will own a minimum of 79.4% of the
outstanding shares of New Cornerstone Common Stock and the officers and
directors of Cornerstone will continue as the officers and directors of
New Cornerstone. Approval of the Merger Agreement requires the affirmative
vote of a majority of the outstanding shares of Cornerstone.
At the Cornerstone Meeting, shareholders will also be asked to (i)
elect 15 directors to serve as members of the Cornerstone Board of Directors
until their successors are elected and qualified, (ii) approve the amendment of
the Cornerstone Charter to authorize the exercise of trust powers and (iii)
ratify the appointment of auditors. The election of each of the nominees
requires the affirmative vote of the holders of a plurality of the votes cast
at the Cornerstone Meeting. The approval of the amendment to the Cornerstone
Charter requires the affirmative vote of a majority of the outstanding shares
of Cornerstone Common Stock, and the appontment of auditors requires that the
votes cast in favor of the proposals exceed the votes against the proposals.
As of the Cornerstone Record Date, directors and executive officers of
Cornerstone owned beneficially on aggregate of 241,822 shares of Cornerstone
Common Stock, or approximately 41% of the shares of Cornerstone Common Stock
outstanding on such date.
TERMS OF THE MERGER
Merger Consideration Available to East Ridge Shareholders. Upon the
effectiveness of the Merger (the "Effective Time"), each share of East Ridge
common stock ("East Ridge Common Stock") outstanding prior to the Effective
Time will be converted into a right to receive cash and/or New Cornerstone
Common Stock. Shareholders of East Ridge who do not exercise dissenters'
rights may elect to receive New Cornerstone Common Stock and/or cash for their
shares of East Ridge common stock. The number of shares of New Cornerstone
Common Stock received in exchange for East Ridge Common Stock will be based on
an exchange ratio determined by multiplying the number of shares of East Ridge
Common Stock to be exchanged by $56.1772 and then dividing by $12.00 (the "ERB
Exchange Ratio"). Shareholders of East Ridge who exchange their shares for
cash will receive $56.1772 per share. Accordingly, each share of East Ridge
Common Stock will be converted into the right to receive 4.6814 shares of New
Cornerstone Common Stock. However, the aggregate amount of cash to be
delivered to the shareholders of East Ridge will not exceed $4,287,500. To the
extent shareholders of East Ridge elect to receive in the aggregate more than
$4,287,500, cash will be paid on a pro-rata basis to those East Ridge
shareholders electing to receive cash.
Although the Merger Agreement provides that in the event shareholders
of East Ridge elect less than $2,900,000 in cash, Cornerstone may terminate
the Merger Agreement, such eventuality is not likely to occur in that David E.
Young, who beneficially owns 76,139 shares of East Ridge Common Stock, or
approximately 69.8% of the outstanding shares of East Ridge has notified
Cornerstone that he intends to exchange up to 70% of the shares of East Ridge
Common Stock he owns for cash in the aggregate amount of $2,994,076. However,
in the event the elections of the East Ridge shareholders, including Mr. Young,
for cash exceed $4,287,500. Mr. Young's election will be pro rated equally
with all other East Ridge shareholders who have elected cash. See "The Merger
- -- Terms of the Merger".
The Merger will result in a change in control of the ownership and
management of East Ridge. Upon completion of the Merger, if all of the East
Ridge shareholders except Mr. Young who has agreed to exchange a certain
portion of his shares for cash, elect to receive all of the remaining
approximately 153,975 shares of New Cornerstone Common Stock issuable in the
Merger, shareholders of East Ridge will own a maximum of 20.6% of the
outstanding shares of New Cornerstone Common Stock and Cornerstone shareholders
will own 79.4% of the outstanding shares of New Cornerstone Common Stock. The
officers and directors of Cornerstone will continue as the officers and
directors of New Cornerstone.
Merger Consideration Available to Cornerstone Shareholders. At the
Effective Time, each share of Cornerstone common stock and each warrant
exercisable for Cornerstone common stock (unless the context requires
otherwise, the Cornerstone common stock and warrants are referred to
hereinafter collectively as "Cornerstone Common Stock") outstanding prior to
the Effective Time will be converted into a right to receive one share of New
Cornerstone Common Stock and a warrant to purchase one share of New Cornerstone
Common Stock for $12 per share if exercised by February 8, 1998 and for $15 per
share if exercised by February 8, 2001 (unless the context requires otherwise,
"New Cornerstone Common Stock" includes the warrants exercisable for New
Cornerstone Common Stock). New Cornerstone Warrants exercisable for the
purchase of up to 590,130 shares of New Cornerstone Common Stock are issuable
in the Merger. See "The Merger -- Terms of the Merger."
Fractional Shares. No fractional shares of New Cornerstone Common
Stock will be issued in connection with the Merger. In lieu of fractional
shares, New Cornerstone will make a cash payment equal to the fractional
interest which an East Ridge shareholder would otherwise receive multiplied by
$56.1772. The fractional interest will be determined by combining all shares
owned by such East Ridge shareholder. See "The Merger -- Terms of the
Merger."
Election of Form of Merger Consideration
As promptly as practicable after the Merger, New Cornerstone will
provide letters of transmittal to shareholders of East Ridge for the purpose of
exchanging their certificates of East Ridge Common Stock for New Cornerstone
Common Stock and/or cash as elected by the shareholder. To the extent
shareholders of East Ridge elect to receive New Cornerstone Common Stock, such
election will be satisfied. The amount of cash received by an East Ridge
shareholder is subject to the availability of cash to the extent shareholders
of East Ridge elect more than $4,287,500 in cash. In such event, the amount of
cash up to the maximum amount of $4,287,500 will be prorated among all
shareholders of East Ridge, including Mr. Young, requesting cash. In the event
all of the shareholders of East Ridge elect to receive cash for all of their
shares of East Ridge, each shareholder would receive 70% of his Merger
consideration in cash and 30% in New Cornerstone Common Stock.
As promptly as practicable after the Merger, New Cornerstone will
provide letters of transmittal to shareholders of Cornerstone for the purpose
of exchanging their certificates of Cornerstone Common Stock and their warrants
for certificates representing New Cornerstone Common Stock and New Cornerstone
Warrants. See "The Merger -- Surrender of Certificates."
Advantages and Disadvantages of Form of Merger Consideration
To the extent shareholders of East Ridge elect to receive New
Cornerstone Common Stock, they will not recognize gain or loss upon the receipt
of New Cornerstone Common Stock, except to the extent of any cash received in
lieu of fractional shares. To the extent shareholders of East Ridge elect to
receive cash, they will recognize gain or loss as a result of the Merger. See
"The Merger -- Certain Federal Income Tax Consequences."
Additionally, there is no market for the New Cornerstone Common Stock
and there is no assurance that an active and liquid market will develop.
Therefore, East Ridge shareholders who elect to receive New Cornerstone Common
Stock and who desire to liquidate their investment may be unable to do so. See
"Risk Factors."
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EFFECTIVE TIME
The Effective Time of the Merger will be 5:01 p.m., Eastern time, on
the later to occur of the acceptance for filing by the Secretary of State of
the State of Tennessee of articles of merger filed in accordance with the
Tennessee Banking Act (the "TBA"), or on such later date as the articles of
merger may specify. Unless otherwise mutually agreed upon by East Ridge and
Cornerstone, the Merger will occur on the last business day of the month after
all conditions contained in the Merger Agreement have been satisfied or waived,
including receipt of all regulatory approvals and termination of all statutory
waiting periods.
REASONS FOR THE MERGER; RECOMMENDATION OF BOARDS OF DIRECTORS
The Board of Directors of East Ridge (the "East Ridge Board")
believes the Merger is fair to and in the best interest of East Ridge and its
unaffiliated shareholders and recommends that East Ridge's shareholders vote
FOR approval of the Merger Agreement despite the fact that David E. Young, the
principal shareholder of East Ridge, negotiated the transaction and negotiated
favorable terms for himself, including a consulting arrangement and the right
to require New Cornerstone to redeem shares of New Cornerstone Common Stock
which he receives in the Merger, that do not apply to unaffiliated East Ridge
shareholders. See "The Merger -- Background of and Reasons for the Merger."
For information on the interests of certain officers and directors of East
Ridge, including Mr. Young, in the Merger, see "The Merger -- Interests of
Certain Persons in the Merger."
The Board of Directors of Cornerstone (the "Cornerstone Board")
believes the Merger is fair to and in the best interest of Cornerstone and its
shareholders and recommends that Cornerstone's shareholders vote FOR approval
of the Merger Agreement. See "The Merger -- Background of and Reasons for the
Merger." For information on the interests of certain officers and directors of
Cornerstone in the Merger, see "The Merger -- Interests of Certain Persons in
the Merger."
OPINION OF FINANCIAL ADVISER
Mercer Capital ("Mercer") has delivered its written opinion to the
Cornerstone Board to the effect that, as of the date of the Merger Agreement
and the date of this Joint Proxy Statement/Prospectus, the transaction is fair,
from a financial point of view, to the holders of Cornerstone Common Stock. A
copy of the opinion of Mercer dated April 25, 1997 is attached hereto as
Appendix B. The opinion should be read in its entirety for a description of
the procedures followed, assumptions and qualifications made, matters
considered, and the limitations observed by Mercer. See "The Merger -- Opinion
of Cornerstone's Financial Adviser."
The East Ridge Board determined that it was not necessary to engage a
financial advisor for the purpose of providing an opinion with respect to the
fairness of the transaction from a financial point of view to the holders of
East Ridge Common Stock. The East Ridge Board made such determination based on
the facts that the East Ridge Board had previously retained Alex Sheshunoff &
Company as its financial advisor which had not been able to obtain any
acquisition proposal superior to the Cornerstone proposal and management of
East Ridge had conducted, or caused to be conducted, a due diligence
investigation of the quality of the Cornerstone loan and securities
portfolios. See "The Merger -- Background and Reasons for the Merger."
CONDITIONS; REGULATORY APPROVALS
Consummation of the Merger is subject to various conditions, including
receipt of the shareholder approval solicited hereby, receipt of the necessary
regulatory approvals, receipt of an opinion of counsel regarding certain tax
aspects of the Merger, implementation, to the extent consistent with generally
accepted accounting principles ("GAAP"), of certain adjustments to East Ridge's
loan, litigation and real estate valuation policies and practices (including
loan classifications and levels of reserves) and satisfaction of customary
closing conditions.
The regulatory approvals and consents necessary to consummate the
transactions contemplated by the Merger Agreement include the approval of the
Federal Deposit Insurance Corporation ("FDIC") and the Tennessee Department of
Financial Institutions (the "TDFI"). Applications have been submitted for such
approvals. There can be no assurances as to when, if or with what conditions
such approvals will be granted. See "The Merger -- Conditions to Consummation
of the Merger," "-- Regulatory Approvals" and "-- Conduct of Business Pending
the Merger."
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the
Merger by the mutual consent of East Ridge and Cornerstone, in the event the
shareholders of either East Ridge or Cornerstone fail to approve the Merger
Agreement or by either if its Board of Directors so determines by a vote of the
majority of the members of its entire Board, in the event of a material breach
of a representation, warranty or covenant in the event such breach is not cured
within 60 days of notice of such breach is provided to the breaching party and
in the event East Ridge shareholders elect to receive consideration of less
than $2,900,000 in cash. It is unlikely that the Merger Agreement would be
terminated for the last reason listed because David E. Young has agreed to
exchange 70% of his East Ridge Common Stock for cash in the aggregate amount of
$2,994,076. See "The Merger -- Waiver and Amendment; Termination."
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MANAGEMENT AFTER THE MERGER
After the Merger, the directors and officers of Cornerstone
will become the directors and officers of East Ridge and Bank of East Ridge.
See "The Merger -- Management After the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of East Ridge's management and the East Ridge Board
have certain interests in the Merger that are in addition to their interests as
shareholders of East Ridge generally. Each of David E. Young, James D.
Renegar, James R. Young, Jr. and Daniel O. Crye is a party to a
Change-in-Control Protective Agreement and an Executive Salary Continuation
Agreement which provides for certain payments in the event their employment is
terminated under certain circumstances after a change in control of East Ridge.
At the time of the Merger, David E. Young will waive his right to
receive severance payments pursuant to the Change-in-Control Protective
Agreement and will enter into a consulting agreement with East Ridge pursuant
to which Mr. Young will provide consulting services to East Ridge for a period
of five years and for which he will receive $75,000 annually payable in equal
monthly installments. Under the terms of the consulting agreement, Mr. Young
will be available to Cornerstone to consult with it on general banking matters,
marketing issues, customer contacts and personnel and other management issues.
Mr. Young is not required to provide any minimum amount of such services or
work any specific number of hours under such consulting agreement and is merely
to make himself available upon reasonable notice.
Mr. Young also has the right to sell the shares of New Cornerstone
Common Stock he receives in the Merger back to New Cornerstone over a
three-year period at $12.55 (46,745 shares), $14.00 (28,356 shares) and $16.00
(21,756) per share in years 1998, 1999 and 2000, respectively. New Cornerstone
has the option to redeem such shares during the same period at the same prices.
No other East Ridge shareholders who receive shares of New Cornerstone Common
Stock will have the same opportunity to require New Cornerstone to redeem their
shares. New Cornerstone will reimburse Mr. Young for any interest expense he
incurs in connection with the debt he incurred to purchase substantially all of
his shares of East Ridge Common Stock if the Merger does not close by August
12, 1997. Cornerstone is a participant in a $3,750,000 commercial bank loan to
Mr. Young, the proceeds of which were used to purchase East Ridge Common Stock.
Cornerstone's participation is $750,000. New Cornerstone will also reimburse
Mr. Young for his attorneys fees incurred in connection with the Merger. See
"The Merger -- Interests of Certain Persons in the Merger."
Pursuant to the Change-in-Control Protective Agreements (the
"Protective Agreement"), Messrs. Renegar, James R. Young, Jr. and Crye are
entitled to receive an aggregate of up to $300,000 under certain circumstances.
However, it is presently anticipated that Messrs. Renegar, James R. Young, Jr.
and Crye will continue their employment with Cornerstone Community Bank after
the Merger and their current employment agreements will remain in effect.
Nevertheless, each is entitled to severance benefits in the event he elects to
terminate his employment within 30 days after the consummation of the Merger or
within 90 days of the Merger if he terminates his employment for "Good Reason."
"Good Reason" is defined in the Protective Agreement as (i) the requirement that
the employee move his personal residence, or perform his principal executive
functions, more than 30 miles from his primary office as of the date of the
Change in Control; (ii) a reduction of more than 10% in the employee's base
compensation as in effect on the date of the Change in Control; (iii) the
failure by the successor corporation to provide the employee with compensation
and benefits substantially similar to those provided to him by East Ridge; or
(iv) a failure to elect the employee to the board of directors of the successor
corporation if the employee is serving on such board at the time of the Change
in Control. Additionally, the employee is entitled to the severance benefit in
the event his employment is terminated without "Just Cause" as defined in the
Protective Agreement during the period beginning six months before a Change in
Control and ending on the second anniversary of the Change in Control. David E.
Young will receive $75,000 per year for 5 years under his consulting agreement
in lieu of severance benefits under the Continuation Agreement since his
employment will be terminated as a result of the Merger. See "The Merger --
Interests of Certain Persons in the Merger."
Additionally, Messrs. David E. Young, Renegar and James R. Young are
parties to Executive Salary Continuation Agreements (the "Continuation
Agreement") and Mr. Crye is a party to a Survivor Income Agreement each of which
provide salary continuation benefits in the event the executive remains in the
employ of East Ridge during his lifetime or until retirement at the age of 70.
In the event the employment of the executive is terminated prior to retirement,
the executive is entitled to a certain percentage of the benefits depending on
his length of employment. See "The Merger -- Interests of Certain Persons in
the Merger."
CERTAIN DIFFERENCES IN SHAREHOLDERS' RIGHTS
Upon the effectiveness of the Merger, shareholders of Cornerstone,
a Tennessee banking corporation, will become shareholders of New Cornerstone
(formerly, East Ridge), a Tennessee corporation, and their rights as
shareholders of New Cornerstone will be determined by the Tennessee Business
Corporation Act ("TBCA") and by New Cornerstone's Charter and Bylaws, as
amended and restated pursuant to the Merger Agreement, rather than the
Tennessee Banking Act ("TBA") and the rules and regulations of the FDIC. The
rights of shareholders of Cornerstone currently differ from rights of the
shareholders of East Ridge with respect to certain important matters, including
their rights to remove and elect directors, call annual meetings, inspect
corporate books and records, amend the charter and bylaws, dissolve the
corporation, take action without a meeting, receive dividends, require
appraisal or dissent with respect to their shares, and approve the
corporation's undertaking of conflict-of-interest transactions; the required
shareholder votes as to certain matters; indemnification provisions; and
statutory and other restrictions on certain business combinations and share
acquisitions. For a summary of these differences, see "Effect of the Merger on
Rights of Shareholders."
Upon the effectiveness of the Merger, shareholders of East Ridge who
elect to receive shares of New Cornerstone Common Stock will be governed by the
Amended and Restated Charter of New Cornerstone and Amended and Restated Bylaws
of New Cornerstone as provided in the Merger Agreement. Their rights as
shareholders of East Ridge will continue to be determined by the TBCA.
DISSENTERS' RIGHTS
Under the TBCA, holders of East Ridge Common Stock who vote against
the Merger and who deliver to East Ridge the required written demand and who
otherwise comply with the requirements of the TBCA will be entitled to receive
the value of their shares in cash as determined under the provisions of the
TBCA. SUCH RIGHT WILL BE LOST, HOWEVER, IF THE PROCEDURAL REQUIREMENTS OF THE
TBCA ARE NOT FULLY AND PRECISELY SATISFIED. See "The Merger -- Dissenters'
Rights" and Appendix C.
Under the TBA, holders of Cornerstone Common Stock who vote against
the Merger and who deliver to Cornerstone the required written demand and who
otherwise comply with the requirements of the TBCA will be entitled to receive
the value of their shares in cash as determined under the provisions of the
TBCA. SUCH RIGHT WILL BE LOST, HOWEVER, IF THE PROCEDURAL REQUIREMENTS OF THE
TBCA ARE NOT FULLY AND PRECISELY SATISFIED. See "The Merger -- Dissenters'
Rights" and Appendix C.
- 7 -
<PAGE> 19
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Cornerstone and East Ridge have received an opinion of counsel that for
federal income tax purposes the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and, accordingly, for federal income tax purposes,
neither shareholders of Cornerstone nor shareholders of East Ridge will
recognize gain or loss upon the receipt of New Cornerstone Common Stock, except
to the extent of any cash received in exchange for shares of East Ridge Common
Stock or cash received in lieu of fractional shares. In addition, the exchange
of the Cornerstone warrants for New Cornerstone Warrants may not be considered
to be part of the reorganization under present federal income tax regulations,
and, therefore, gain or loss may be recognized on this exchange. Consummation
of the Merger is dependent upon, among other conditions, receipt by East Ridge
and Bank of East Ridge of an opinion of counsel substantially to this effect.
East Ridge shareholders who elect to receive cash in exchange for their shares
of East Ridge Common Stock may incur tax as a result of the exchange. In
addition, the exchange of Cornerstone warrants for New Cornerstone Warrants is
not considered to be part of the reorganization under the present federal
income tax regulations, and, therefore, this exchange may not be tax-free.
East Ridge and Cornerstone shareholders are urged to consult their own
tax advisers as to the specific tax consequences to them of the Merger,
including the applicability and effect of federal, state, local and other tax
laws. See "The Merger -- Certain Federal Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase and is a "reverse
acquisition" where the acquirer is deemed to be Cornerstone in view of the 79.4%
ownership interest of the Cornerstone shareholders in New Cornerstone after the
Merger. See "The Merger -- Accounting Treatment."
- 8 -
<PAGE> 20
MARKET PRICES OF COMMON STOCK
Neither the East Ridge Common Stock nor the Cornerstone Common Stock is
listed, traded or quoted on any securities exchange or in the over-the-counter
market, and no dealer makes a market in either Common Stock, although isolated
transactions between individuals occur from time to time. To East Ridge
management's knowledge, the most recent transaction with respect to East Ridge
Common Stock was at $56.17 per share; and to Cornerstone management's
knowledge, the most recent transaction with respect to Cornerstone Common Stock
was $13.50 per share. The shares of New Cornerstone Common Stock and New
Cornerstone Warrants to be issued hereunder are registered under the Securities
Act of 1933, as amended (the "1933 Act"), but it is not anticipated that a
trading market for either will develop.
EQUIVALENT AND PRO FORMA SHARE DATA
The following table presents selected comparative unaudited per share data
for East Ridge Common Stock and Cornerstone Common Stock on a historical basis,
and for New Cornerstone Common Stock on a pro forma combined basis giving
effect to the Merger [on a purchase accounting basis] as a "reverse
acquisition" where the acquirer is deemed to be Cornerstone in view of the
79.4% ownership interest of the Cornerstone shareholders in New Cornerstone
after the Merger. The data are not necessarily indicative of the results of
the future operations of the combined entity or the actual results that would
have occurred had the Merger been consummated prior to the periods indicated.
For a description of the purchase accounting basis with respect to the Merger
and the related effects on the historical financial statements of East Ridge,
see "The Merger -- Accounting Treatment." The information is derived from and
should be read in conjunction with the historical financial statements of East
Ridge and Cornerstone, including the related notes thereto, included herein.
See "Index to Financial Information."
The Merger Agreement provides that, as soon as practicable prior to
consummation of the Merger but after Cornerstone has acknowledged that all
conditions to its obligation to consummate the Merger have been satisfied, East
Ridge will, consistent with GAAP, modify and change its loan, litigation and
real estate valuation policies and practices (including loan classifications
and levels of reserves) so as to be applied consistently on a mutually
satisfactory basis with those of Cornerstone.
EQUIVALENT AND PRO FORMA SHARE DATA (UNAUDITED)
<TABLE>
<CAPTION>
March 31, Year Ended December 31,
----------------- ----------------------------
1997 1996 1996 1995(1) 1994(2)
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Income Per Common Share:(1)
East Ridge ..................... $ 1.02 $ 0.97 $ 4.34 $ 3.06 $ 1.96
Cornerstone .................... 0.02 (0.87)
New Cornerstone pro forma ...... 0.09 0.09
Fully Diluted Income Per Common
Share:(2)
East Ridge ..................... $ 1.02 $ 0.97 $ 4.34 $ 3.06 $ 1.96
Cornerstone .................... 0.02 (0.87)
New Cornerstone pro forma ...... 0.09 0.09
Book Value Per Common Share (end of
period):(3)
East Ridge ..................... $ 28.28 $24.40 $27.70 $23.66 $19.90
Cornerstone .................... 9.10 9.11
New Cornerstone pro forma ...... 9.34 9.35
</TABLE>
(1) Information provided for Cornerstone is as of and for the three months
ended March 31, 1997 and as of December 31, 1996 and for the period from
inception (January 23, 1996) through December 31, 1996.
(2) East Ridge's income per common share is based on the fully diluted average
number of shares outstanding for each period presented. Pro forma income per
share is calculated using combined historical income for East Ridge and
Cornerstone, as adjusted for the Merger, divided by the average pro forma
common shares of the combined entity. The average pro forma common shares of
the combined entity have been calculated by assuming the exchange of 30% of the
outstanding shares of East Ridge Common Stock based on the ERB Exchange Ratio.
(3) New Cornerstone pro forma book value per common share is based upon the
historical total common equity of the combined entity.
SELECTED FINANCIAL DATA AND RATIOS (UNAUDITED)
The following tables present for East Ridge and Cornerstone, on a
historical basis, selected unaudited financial data and ratios and, for East
Ridge (consolidated), unaudited pro forma combined amounts and ratios. This
information is based on the consolidated financial statements of East Ridge and
financial statements of Cornerstone appearing herein and the unaudited pro
forma combined
- 9 -
<PAGE> 21
financial information of New Cornerstone appearing elsewhere in this Joint
Proxy Statement/Prospectus and should be read in conjunction therewith and with
the notes thereto. See "Index to Financial Information." The pro forma data
and ratios set forth in the following tables do not reflect certain accruals
that may be required to be made by New Cornerstone pursuant to the Merger
Agreement which are described under "Summary -- Equivalent and Pro Forma Share
Data."
SELECTED FINANCIAL DATA AND RATIOS (UNAUDITED)
(Dollars in thousands, except per share)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Twelve Months Ended December 31,
------------------- -------------------------------------------------
1997 1996(1) 1996 1995(1) 1994(1) 1993(1) 1992(1)
------- ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Interest Income and Other
Income:
East Ridge . . . . . . . . . . . . . . $ 964 $ 941 $ 3,786 $ 3,483 $ 2,979 $ 2,646 $ 2,353
Cornerstone . . . . . . . . . . . . . . 695 1,269
New Cornerstone pro forma . . . . . . . 1,605 4,841
Net Income Applicable to Common
Stock:
East Ridge . . . . . . . . . . . . . . $ 1.02 $ 0.97 $ 4.34 $ 3.06 $ 1.96 $ 1.49 $ 1.39
Cornerstone . . . . . . . . . . . . . . 0.02 (0.87)
New Cornerstone pro forma . . . . . . . 0.09 0.09
Net Income per Common Share:(2)
East Ridge . . . . . . . . . . . . . . $ 1.02 $ 0.97 $ 4.34 $ 3.06 $ 1.96 $ 1.49 $ 1.39
Cornerstone . . . . . . . . . . . . . . 0.02 (0.87)
New Cornerstone pro forma . . . . . . . 0.09 0.09
Dividends Declared per Common
Share:
East Ridge . . . . . . . . . . . . . . -- -- -- -- -- -- --
Cornerstone . . . . . . . . . . . . . . -- --
New Cornerstone pro forma . . . . . . . --
Total Assets (end of period):
East Ridge . . . . . . . . . . . . . . $44,533 $42,410 $44,366 $40,399 $33,614 $32,307 $27,493
Cornerstone . . . . . . . . . . . . . . 36,329 28,298
New Cornerstone pro forma . . . . . . . 79,868 71,706
Long-Term Debt and Capital Leases
(end of period):
East Ridge . . . . . . . . . . . . . . $ 364 $ 355 $ 364 $ 355 $ 355 $ 324 $ 389
Cornerstone . . . . . . . . . . . . . . -- --
New Cornerstone pro forma . . . . . . . 364 364
Performance Ratios:
Return on Average Assets(3)
East Ridge . . . . . . . . . . . . . 1.03% 1.11% 1.16% 0.91% 0.65% 0.53% 0.51%
Cornerstone . . . . . . . . . . . . . 0.14 (3.20)
New Cornerstone pro forma . . . . . . 0.29 0.08
Return on Average Shareholders'
Equity(3)
East Ridge . . . . . . . . . . . . . . 15.27% 17.57% 17.06% 14.06% 10.21% 8.31% 8.53%
Cornerstone . . . . . . . . . . . . . 0.82 (9.74)
New Cornerstone pro forma . . . . . . 3.78 0.99
Shareholders' Equity to Total Assets . .
(end of period)
East Ridge . . . . . . . . . . . . . 6.92% 6.44% 6.87% 6.56% 6.63% 6.37% 6.18%
Cornerstone . . . . . . . . . . . . . 16.61 19.00
New Cornerstone pro forma . . . . . . 7.57 8.44
</TABLE>
- -----------------
(1) Information provided for Cornerstone is as of and for the three months
ended March 31, 1997 and as of December 31, 1996 and for the period from
inception (January 23, 1996) through December 31, 1996.
(2) East Ridge's income per common share is based on the fully diluted average
number of shares outstanding for each period presented. Pro forma income per
share is calculated using combined historical income for East Ridge and
Cornerstone, as adjusted for the Merger, divided by the average pro forma
common shares of the combined entity. The average pro forma common shares of
the combined entity have been calculated by assuming the exchange of 30% of the
outstanding shares of East Ridge Common Stock based on the ERB Exchange Ratio.
(3) Ratios for March 31, 1997 and 1996 have been annualized.
- 10 -
<PAGE> 22
RECENT DEVELOPMENTS
EAST RIDGE
The following is a summary of financial condition and a summary of
operations and other data for East Ridge as of June 30, 1997. This information
has been derived from unaudited consolidated statements and reflects all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair statement of results of operations for the periods presented.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
SUMMARY OF FINANCIAL CONDITION:
<S> <C>
ASSETS:
Cash and due from banks................................................... $ 3,095
Securities available for sale............................................. 7,361
Securities held to maturity............................................... 5,035
Loans, net................................................................ 25,537
All other assets.......................................................... 2,319
-------
Total assets......................................................... $43,347
=======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits.................................................................. $39,313
All other liabilities..................................................... 783
Stockholders' equity...................................................... 3,251
-------
Total liabilities and stockholders' equity........................... $43,347
=======
Six Months Ended
June 30, 1997
-------------
SUMMARY OF INCOME STATEMENT:
Interest income........................................................... $ 1,754
Interest expense.......................................................... 799
-------
Net interest income....................................................... 955
Provision for loan losses................................................. 28
-------
Net interest income after provision for loan losses....................... 927
-------
Noninterest income........................................................ 248
-------
Noninterest expense....................................................... 848
-------
Provision for income taxes................................................ 78
-------
Net income........................................................... $ 229
=======
Weighted average number of common shares outstanding...................... 109
=======
Net income per share................................................. $ 2.10
=======
SUPPLEMENTAL DATA:
Return on average assets (annualized).................................... 1.04%
Average equity to average assets......................................... 7.13%
</TABLE>
At June 30, 1997, East Ridge's total assets decreased 2.66%. This is due
to a decrease in deposits, which in turn decreased the flow of funds into cash
and cash equivalent balances. The deposit decrease is due to the maturing of
certificates of deposit, which were generated during 1996 when Bank of East
Ridge offered competitive prices to customers.
The six months of 1997 reflect net income of $229,000. This is
consistent with the net income of $109,000 for the first three months of 1997.
Noninterest income increased an additional $45,000 due to the sale of an SBA
loan during the second quarter of 1997. Noninterest expense increased due
to additional professional fees generated during the second quarter of 1997.
No other material changes occurred in the results of operations for the six
months ended June 30, 1997.
-13-
<PAGE> 23
CORNERSTONE
The following is a summary of financial condition and a summary of
operations and other data for Cornerstone as of June 30, 1997. This information
has been derived from unaudited statements consolidated statements and reflects
all normal recurring adjustments which are, in the opinion of management,
necessary for a fair statement of results of operations for the periods
presented.
<TABLE>
<CAPTION>
June 30, 1997
-------------
<S> <C>
SUMMARY OF FINANCIAL CONDITION:
ASSETS:
Cash and due from banks................................ $ 1,884
Securities available for sale.......................... 1,903
Securities held to maturity............................ 8,688
Loans, net............................................. 27,530
All other assets....................................... 1,908
-------------
Total assets......................................... $ 41,913
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits............................................... $ 36,245
All other liabilities.................................. 234
Stockholders' equity................................... 5,434
------------
Total liabilities and stockholders' equity........... $41,913
============
Six Months ended
June 30, 1997
-------------
SUMMARY OF INCOME STATEMENT:
Interest income....................................... $ 1,505
Interest expense...................................... 779
------------
Net interest income................................... 726
Provision for loan losses............................. 156
------------
Net interest income after provision for loan losses... 570
------------
Noninterest income.................................... 51
------------
Noninterest expense................................... 581
------------
Income tax expense.................................... 0
------------
Net income.......................................... $ 40
============
Net income per share (weighted average)............. $ 0.07
SUPPLEMENTAL DATA:
Return on average assets (annualized)................. 0.22%
Average equity to average assets 14.74%
</TABLE>
At June 30, 1997, Cornerstone's total assets increased be approximately
$5.6 million from total assets at March 31, 1997. The increase was primarily
attributable to an increase in loan demand. Loans were approximately $27.5
million compared to approximately $22.1 million at March 31, 1997.
Cornerstone's net income for the six months ended June 30, 1997 increased to
$40,000 from net income of $11,000 at March 31, 1997. This increase is
primarily attributable to an increase in interest-earning assets.
-14-
<PAGE> 24
RISK FACTORS
ABSENCE OF EXISTING PUBLIC MARKET; MARKET PRICES
There is no existing market for the New Cornerstone Common Stock.
Application has not been made to list the New Cornerstone Common Stock on the
NASDAQ National Market or on any other stock exchange. There can be no
assurance that an active and liquid trading market for the New Cornerstone
Common Stock will develop. Further trading prices of the New Cornerstone
Common Stock will depend on many factors including, among other things, the
operating results and financial condition of New Cornerstone and the market for
similar securities. There can be no assurance as to the market price for the
New Cornerstone Common Stock.
ABILITY OF NEW CORNERSTONE TO EXECUTE ITS BUSINESS STRATEGY
The financial performance of New Cornerstone will depend in part on New
Cornerstone's ability to successfully integrate the operations and management
of Cornerstone Community Bank and Bank of East Ridge. There can be no
assurance that New Cornerstone will be able to effectively and profitably
integrate the operations and management of Cornerstone Community Bank and Bank
of East Ridge.
INTEREST RATE RISK
Banking companies' earnings depend largely on the relationship between the
cost of funds, primarily deposits, and the yield on earning assets. This
relationship, known as the interest rate spread, is subject to fluctuation and
is affected by economic and competitive factors which influence interest rates,
the volume and mix of interest-earning assets and interest-bearing liabilities,
and the level of nonperforming assets. Fluctuations in interest rates may
affect the demands customers have for banking companies' products and services.
East Ridge and Cornerstone are, and New Cornerstone will be, subject to
interest rate risks to the degree that interest-bearing liabilities reprice or
mature more slowly or more rapidly or on a different basis than its
interest-earning assets. Given East Ridge's and Cornerstone's current volume
and mix of interest-bearing liabilities and interest-earning assets, interest
rate spread could be expected to increase during times of rising interest rates
and, conversely, to decline during times of falling interest rates. Although
both East Ridge and Cornerstone believe their current levels of interest rates
sensitivity is reasonable, significant fluctuations in interest rates may have
an adverse effect on their respective results of operations.
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION
East Ridge's operations are located and concentrated primarily in the
Chattanooga, Tennessee area, which include the counties of Hamilton in
Tennessee, and Catoosa and Walker in Georgia. Cornerstone's operations are
located and concentrated primarily in Hamilton County, Tennessee. As a result
of the geographic concentration, East Ridge's and Cornerstone's results depend
largely upon economic conditions in these areas. A deterioration in economic
conditions in these market areas could have a materially adverse impact on the
quality of the loan portfolio and the demand for products and services, and,
accordingly, the results of operations. See "Information Concerning East
Ridge" and "Information Concerning Cornerstone."
GOVERNMENT REGULATIONS AND MONETARY POLICY
The banking industry is subject to extensive federal and state supervision
and regulation. Such regulation limits the manner in which East Ridge, Bank of
East Ridge and Cornerstone conduct their respective businesses, undertake new
investments and activities, and obtain financing. This regulation is intended
primarily for the protection of the deposit insurance fund and consumers, and
not to benefit the holders of East Ridge's and Cornerstone's securities.
Financial institution regulation has been the subject of significant
legislation in recent years, and may be the subject of further significant
legislation in the future, none of which is in the control of East Ridge or
Cornerstone. Significant new laws or changes in, or repeals of, existing laws
may cause East Ridge's and Cornerstone's results to
- 11 -
<PAGE> 25
differ materially. Further, federal monetary policy, particularly as
implemented through the Federal Reserve System, significantly affects credit
conditions for East Ridge and Cornerstone, primarily through open market
operations in the United States government securities, the discount rates for
bank borrowings and bank reserve requirements, and a material change in these
conditions would be likely to have a material impact on East Ridge's and
Cornerstone's results of operations. See "Information Concerning East Ridge -
Supervision and Regulation" and "Information Concerning Cornerstone -
Supervision and Regulation."
COMPETITION
The banking and financial services business in the Chattanooga area
generally, and East Ridge's and Cornerstone's market areas specifically, is
highly competitive. The increasingly competitive environment is a result
primarily of changes in regulation, changes in technology and product delivery
systems, and the accelerating pace of consolidation among financial services
providers. East Ridge and Cornerstone compete for loans, deposits and
customers and delivery of financial services with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market funds, credit
unions, and other non-bank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
either East Ridge or Cornerstone. There can be no assurance that East Ridge,
Cornerstone or New Cornerstone, after the Merger, will be able to compete
effectively and the results of operations of each could be adversely affected
if circumstances affecting the nature or level of competition change. See
"Information Concerning East Ridge - Competition" and "Information Concerning
Cornerstone - Competition."
DEPENDENCE ON KEY PERSONNEL
After the Merger, New Cornerstone's success will depend substantially
on certain members of its senior management, in particular, Timothy L. Hobbs,
Earl A. Marler, Jr. and Carolyn C. Johnson. New Cornerstone's business and
financial condition could be materially adversely affected by the loss of the
services of either of such individuals. New Cornerstone does not anticipate
maintaining key person life insurance. See "Management of Cornerstone."
CREDIT QUALITY
A significant source of risk for East Ridge and Cornerstone arises from the
possibility that losses will be sustained because borrowers, guarantors and
related parties may fail to perform in accordance with the terms of their
loans. Both East Ridge and Cornerstone have adopted underwriting and credit
monitoring procedures and credit policies, including the establishment and
review of the allowance for credit losses that management of each believes are
appropriate to minimize this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying each company's
credit portfolio. Such policies and procedures, however, may not prevent
unexpected losses that could materially adversely affect East Ridge's and
Cornerstone's results of operations and the results of operations of New
Cornerstone after the Merger.
ANTI-TAKEOVER PROVISIONS.
The Amended and Restated Charter of New Cornerstone and the Amended and
Restated Bylaws of New Cornerstone will contain provisions which may make New
Cornerstone a less attractive target for acquisition by anyone who does not
have the support of New Cornerstone's Board of Directors, including a
requirement of the super majority vote of shareholders or directors for the
approval of certain acquisitions of shares of common stock. Additionally,
holders of New Cornerstone Common Stock who were formerly shareholders of
Cornerstone will become subject to several state statutes which provide
anti-takeover protection for Tennessee corporations. See "Effect of the Merger
on the Rights of Shareholders."
FUTURE FINANCING NEEDS
While there is no current plan to do so, New Cornerstone may, in the future,
incur indebtedness. The degree to which New Cornerstone becomes leveraged
could have important consequences to holders of New Cornerstone Common Stock,
including: (i) New Cornerstone's ability to obtain financing to meet regulatory
capital requirements, for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired in the future; (ii)
a substantial portion of New Cornerstone's cash flow from operations could be
dedicated to the payment of principal of and interest on any such future
borrowings, thereby reducing the funds available to New Cornerstone for its
operations and other purposes; and (iii) New Cornerstone could be unable to
adjust to rapidly changing market conditions and could be vulnerable in the
event of a downturn in general economic conditions or its business.
- 12 -
<PAGE> 26
THE ANNUAL MEETINGS
MEETINGS OF SHAREHOLDERS
This Joint Proxy Statement/Prospectus is being furnished to the holders of
East Ridge Common Stock in connection with the solicitation of proxies by and
on behalf of the East Ridge Board for use at the East Ridge Meeting to be held
at 10 a.m., Eastern Daylight Savings Time, on August ___, 1997, at Chattanooga,
Tennessee, and at any adjournments thereof. The East Ridge Board has fixed the
close of business on July ___, 1997 as the East Ridge Record Date for
determining the shareholders of East Ridge entitled to vote at the East Ridge
Meeting. This Joint Proxy Statement/Prospectus and the enclosed proxy are
first being sent to holders of East Ridge Common Stock on or about July ___,
1997.
This Joint Proxy Statement/Prospectus is also being furnished to the holders
of Cornerstone Common Stock in connection with the solicitation of proxies by
and on behalf of the Cornerstone Board for use at the Cornerstone Meeting to be
held at 12:00 noon, Eastern Daylight Savings Time, on August ___, 1997, at
________ Chattanooga, Tennessee, and at any adjournments thereof. The
Cornerstone Board has fixed the close of business on July ___, 1997 as the
Cornerstone Record Date for determining the shareholders of Cornerstone
entitled to vote at the Cornerstone Meeting. This Joint Proxy
Statement/Prospectus and the enclosed proxy are first being sent to holders of
Cornerstone Common Stock on or about July ___, 1997.
PURPOSE OF MEETINGS
At the East Ridge Meeting, East Ridge's shareholders will consider and vote
upon (i) the approval and adoption of the Merger Agreement (ii) the election of
each of six nominees to serve on the East Ridge Board until their successors
are elected and qualified, and (iii) such other business as may properly come
before the East Ridge Meeting or any adjournments thereof.
At the Cornerstone Meeting, Cornerstone's shareholders will consider and vote
upon (i) the approval and adoption of the Merger Agreement; (ii) the election
of each of 15 nominees to serve on the Cornerstone Board until their successors
are elected and qualified ; (iii) the approval of an amendment to the
Cornerstone Charter to authorize the exercise of trust powers, subject to
regulatory approval; (iv) the ratification of the appointment of auditors; and
(v) such other business as may properly come before the Cornerstone Meeting or
any adjournments thereof.
VOTING REQUIREMENTS AT MEETINGS
At the East Ridge Meeting, approval and adoption of the Merger Agreement
requires the affirmative vote of a majority of the outstanding shares of East
Ridge and the election of each of the six nominees to serve on the East Ridge
Board requires the affirmative vote of the holders of a plurality of the votes
cast. The presence at the East Ridge Meeting, in person or by proxy, of the
holders of a majority of the total number of shares of East Ridge Common Stock
outstanding on the East Ridge Record Date will constitute a quorum for the
transaction of business by such holders at the East Ridge Meeting. On the East
Ridge Record Date, there were 109,030 outstanding shares of East Ridge Common
Stock, each holder of which is entitled to one vote per share with respect to
each matter to be voted on at the East Ridge Meeting. East Ridge has no class
or series of stock outstanding other than East Ridge Common Stock entitled to
vote at the East Ridge Meeting.
As of the East Ridge Record Date, directors and executive officers of East
Ridge owned beneficially an aggregate of 83,344 shares of East Ridge Common
Stock or approximately 76% of the shares of East Ridge Common Stock outstanding
on such date. Of such 83,344 shares, David E. Young, a director of East Ridge
and Chairman of the Board of Bank of East Ridge, beneficially owns 76,139
shares of East Ridge Common Stock, or approximately 69.8% of the outstanding
East Ridge Common Stock. Mr. Young has agreed to vote all of
- 13 -
<PAGE> 27
his shares in favor of the Merger. Accordingly, approval of the Merger
Agreement by the East Ridge shareholders is assured.
At the Cornerstone Meeting, approval and adoption of the Merger Agreement and
approval of the amendment to the Cornerstone Charter to authorize the exercise
of trust powers require the affirmative vote of the holders of a majority of
the outstanding shares of Cornerstone Common Stock and the election of each of
the 16 nominees to serve on the Cornerstone Board requires the affirmative vote
of the holders of a plurality of the votes cast. The ratification of the
appointment of auditors requires that votes cast in favor of the proposal
exceed votes cast against the proposal. The presence at the Cornerstone
Meeting, in person or by proxy, of the holders of a majority of the total
number of shares of Cornerstone Common Stock outstanding on the Cornerstone
Record Date will constitute a quorum for the transaction of business by such
holders at the Cornerstone Meeting. On the Cornerstone Record Date, there were
590,130 outstanding shares of Cornerstone Common Stock, each holder of which is
entitled to one vote per share with respect to each matter to be voted on at
the Cornerstone Meeting. Cornerstone has no class or series of stock
outstanding other than Cornerstone Common Stock entitled to vote at the
Cornerstone Meeting.
As of the Cornerstone Record Date, directors and executive officers of
Cornerstone owned beneficially an aggregate of 241,822 shares of Cornerstone
Common Stock, or approximately 41% of the shares of Cornerstone Common Stock
outstanding on such date.
At the Meetings, abstentions will be counted as present for quorum purposes,
but will have the same effect as a vote "against" the proposal to approve the
Merger Agreement. Broker "non-votes" will not be considered present for quorum
purposes and will have the same effect as a vote "against" the proposal to
approve the Merger Agreement. A "broker non- vote" refers to shares
represented at the Meetings in person or by proxy by a broker or nominee where
such broker or nominee (i) has not received voting instructions on a particular
matter from the beneficial owners or persons entitled to vote and (ii) the
broker or nominee does not have the discretionary voting power on such matter.
PROXIES
All proxies that are properly executed by holders of East Ridge Common Stock
and received by East Ridge prior to the East Ridge Meeting will be voted in
accordance with the instructions noted thereon. Any proxy that does not
specify to the contrary will be voted in favor of the approval and adoption of
the Merger Agreement. Any holder of East Ridge Common Stock who submits a
proxy will have the right to revoke it, at any time before it is voted, by
filing with the Secretary of East Ridge written notice of revocation or a duly
executed later-dated proxy, or by attending the East Ridge Meeting and voting
such East Ridge Common Stock in person.
All proxies that are properly executed by holders of Cornerstone Common Stock
and received by Cornerstone prior to the Cornerstone Meeting will be voted in
accordance with instructions noted thereon. Any proxy that does not specify to
the contrary will be voted in favor of approval and adoption of the Merger
Agreement. Any holder of Cornerstone Common Stock who submits a proxy will
have the right to revoke it, at any time before it is voted, by filing with the
Secretary of Cornerstone written notice of revocation or a duly executed
later-dated proxy, or by attending the Cornerstone Meeting and voting such
Cornerstone Common Stock in person.
All costs relating to the solicitation of proxies of holders of East Ridge
Common Stock and Cornerstone Common Stock will be borne by East Ridge and
Cornerstone, respectively. Proxies may be solicited by officers, directors and
regular employees of East Ridge and Bank of East Ridge and Cornerstone
personally, by mail or by telephone or otherwise. Although there is no formal
agreement to do so, East Ridge and Cornerstone may reimburse banks, brokerage
houses and other custodians, nominees and fiduciaries holding shares of stock
in their names or those of their nominees for their reasonable expenses in
sending solicitation material to their principals.
- 14 -
<PAGE> 28
It is important that proxies be returned promptly. Shareholders who do not
expect to attend the respective Meetings of East Ridge and Cornerstone in
person are urged to mark, sign and date the respective accompanying proxy and
mail it in the enclosed return envelope, which requires no postage if mailed in
the United States, so that their votes can be recorded.
PROPOSAL 1. THE MERGER
The following information concerning the Merger, insofar as it relates to
matters contained in the Merger Agreement, is qualified in its entirety by
reference to the Merger Agreement which is incorporated herein by reference and
attached hereto as Appendix A. Cornerstone and East Ridge shareholders are
urged to read carefully the Merger Agreement.
BACKGROUND OF AND REASONS FOR THE MERGER
Background.
Historically, the ownership of East Ridge has been concentrated in the hands
of four directors, holding approximately 70% of the outstanding shares.
Management held less than 5% of such outstanding shares. In late 1994, one of
the directors holding approximately 40% of the outstanding shares of East Ridge
was approached concerning the sale of his shares. This director did not sell
his shares but the possibility of a sale of control of East Ridge began to
concern management with regard to the future direction of East Ridge.
Management began to explore the possibility of acquiring East Ridge and made
numerous inquiries as to the financing of such acquisition. These efforts were
unsuccessful. In September 1995, David E. Young, Chairman of Bank of East
Ridge and a director of East Ridge, in a further effort to maintain Bank of
East Ridge as a community bank, negotiated options to acquire 74,629 shares of
East Ridge Common Stock from the four major shareholders who were also members
of the East Ridge Board at an exercise price of $35 per share. The options
were for an initial term of six months, with a six month extension.
At this point, Mr. Young began an active search for potential acquirors of
East Ridge and contacted a total of six regional and community banks to solicit
proposals to acquire East Ridge. During the period from September 1995 through
the summer of 1996, Mr. Young received acquisition proposals in the range of
$5.2 million to $6 million from three of the institutions. None of these
proposals was accepted by the East Ridge Board.
Cornerstone opened on February 20, 1996, with the purpose of becoming a
community bank for the entire Chattanooga area. Organizers of Cornerstone
believed that early opportunities to expand Cornerstone in the greater
community should be explored to implement its growth plan. The Cornerstone
Board was aware that the possibility existed to acquire Bank of East Ridge,
which had been formed to serve as a community bank, and believed that this
acquisition offered the distinct advantage of combining two local community
banks, consistent with the original intent of the Cornerstone organizers to
become a community bank.
The Cornerstone Board appointed Directors Amin, Hobbs, Marler, Pollard and
Wiggins (the "Cornerstone Special Committee") to contact Mr. Young to explore
the feasibility of a business combination. The Cornerstone Special Committee
first met with Mr. Young on February 29, 1996 to explore the possibility of a
transaction. The Committee was informed that a group of directors of East
Ridge, holding the majority of the outstanding stock of East Ridge, was seeking
cash for its holdings. The Cornerstone representatives determined that the best
approach would involve the offer of a combination of both cash and stock.
In April 1996, Mr. Young exercised his option with two of the optionors for a
total of 21,620 shares and tendered his promissory notes in the aggregate
principal amount of $756,700 in payment for such option shares. These
promissory notes matured on January 31, 1997 and provided for interest at the
rate of 6.5% per annum. The promissory notes were secured by a pledge of the
shares acquired under the options. Also in April 1996, Mr. Young entered into
amendments to the options with the other two optionors pursuant to which (i)
the option term was extended until January 31, 1997 and (ii) the optionors were
granted the right to share in the proceeds of any subsequent resale of the
option stock in excess of $35.00 per share. Based upon the exchange ratio set
forth in the Merger Agreement, Mr. Young has paid or will pay an additional
$11.08 per share acquired under such option agreements as so amended.
Subsequent meetings between the Cornerstone Special Committee and Mr. Young
were held on April 10 and 17, 1996, at which there were further discussions
concerning the consideration available for a proposed transaction and its
acceptability to both parties.
- 15 -
<PAGE> 29
At its regular meeting on April 22, 1996, the Special Committee recommended
that the Cornerstone Board make an offer to East Ridge of $6.1 million to be
paid 75% in stock and 25% in cash. The Cornerstone Board believed that upon
completion of an arrangement combining the banks, it would advance its business
plan by approximately 36 months. The Cornerstone Board also believed that the
two banks were similar in philosophies and cultures. The combination would
result in additional operating facilities and branch locations for Cornerstone,
which currently has one 3,500 square foot branch location, and would provide
immediate and adequate space for support services thereby relieving Cornerstone
from having to develop these on its own.
On May 2, 1996, the Cornerstone Special Committee and Mr. Young met again to
explore the possibilities of a combination. Subsequently the Cornerstone
Special Committee informed the Cornerstone Board on May 20, 1996 that its offer
had been rejected because the East Ridge Board had determined that the amount
of stock offered by Cornerstone did not provide the liquidity the East Ridge
shareholders desired. However, the Cornerstone Board increased its offer to
$6.25 million, with the proposed transaction consideration in the form of 50%
cash and 50% stock. East Ridge rejected the revised offer and discussions
between the parties terminated for the remainder of 1996.
In September 1996, the East Ridge Board engaged Alex Sheshunoff & Company
("Sheshunoff") of Austin, Texas as its financial adviser. Sheshunoff
is a nationally recognized analyst of financial institutions furnishing
investment banking and other financial services to the banking industry.
Neither East Ridge nor the Bank of East Ridge had a prior investment banking
relationship with Sheshunoff. Sheshunoff prepared a confidential memorandum
relating to East Ridge and Bank of East Ridge in order to solicit offers to
purchase East Ridge. Sheshunoff submitted its memorandum to approximately 12
potential acquirors. As a result of this solicitation of interest, proposals
from four institutions were received valuing East Ridge in a range of $5
million to $6 million. In a series of meetings during the fall of 1996, the
East Ridge Board determined to reject all of the submitted proposals in its
belief that none of them reflected the true value of East Ridge. In rendering
services to East Ridge, Sheshunoff did not provide an appraisal of East Ridge
or Bank of East Ridge nor did it provide a fairness opinion with respect
to any acquisition proposals solicited by it. Since no acquisition transaction
resulted from its efforts, under the terms of its engagement, Sheshunoff
received no compensation for its solicitations on behalf of East Ridge.
At the end of 1996, management of East Ridge explored the possibility of
electing sub-chapter S tax status for East Ridge in order to reduce East
Ridge's tax burden, thereby facilitating management's attempt to finance the
acquisition of control of East Ridge. In furtherance of this plan,
approximately 2,700 shares of East Ridge Common Stock were redeemed at $35 per
share in order to reduce the total number of shareholders to less than 75 as
required by relevant tax law. However, because of uncertainties concerning
potential adverse tax consequences and continued inability to secure
satisfactory financing, this plan was abandoned.
At the January 20, 1997 meeting, the Cornerstone Board determined to inquire
of East Ridge if discussions could be reopened. Director Wiggins contacted
James Watkins, then the Chairman of East Ridge, who informed him that all
negotiations would be handled by Mr. Young. Thereafter, on January 24, 1997,
Mr. Wiggins met with Mr. Young to discuss reopening the discussions between the
parties. On January 30, 1997, Messrs. Wiggins, Hobbs and Marler from
Cornerstone met with Mr. Young from East Ridge. In conjunction with these
negotiations, Cornerstone agreed to finance Mr. Young's purchase of shares
under the remaining outstanding options and the payment of his notes to other
former optionors. The amount of such financing totaled $3,750,000 with
Cornerstone's participation in the aggregate amount of $750,000.
A subsequent meeting was held at the law offices of Miller & Martin in
Chattanooga on February 3, 1997. Attending this meeting were Messrs. Young,
Wiggins, Hobbs, and Marler from Cornerstone and Ms. Kathryn Edge and W. Scott
McGinness, from Miller & Martin law firm who represented Mr. Young and East
Ridge. Also present was Mark McDowell, a consultant engaged by Cornerstone to
assist in the negotiating process. Colman Hoffman from Baker, Donelson,
Bearman and Caldwell, the legal representative of Cornerstone, was connected by
telephone for the entire meeting. During this meeting, the parties discussed
the transaction, including the structure and amount and form of consideration
which was stock and up to approximately 70% of the consideration in cash for an
aggregate consideration of approximately $6.125 million.
The same group with the exception of Mr. McDowell, but with Mr. Hoffman
present in person, reconvened on February 6, 1997, at the Miller & Martin law
offices with the intent of finalizing the terms of a transaction. An agreement
in principle was reached at this time subject to the approval of the two
Boards.
A special Cornerstone Board meeting was called on February 10, 1997 and the
agreement in principle was approved with a unanimous vote with twelve of the
sixteen directors in attendance. The other four directors approved the
agreement within the next couple of days.
- 16 -
<PAGE> 30
On February 12, 1997, Mr. Young entered into a Stock Purchase Agreement with
Cornerstone relative to the purchase of his shares of East Ridge Common Stock on
terms identical to those set forth in the Merger Agreement. Thereafter on
February 13, 1997, representatives of Cornerstone including Messrs. Marler,
Hobbs and Wiggins, and Colman Hoffman and Bill Carriger, attorneys for
Cornerstone, met with the East Ridge Board, at which meeting terms of the
proposed transaction were discussed in detail. The East Ridge Board determined
that the Cornerstone proposal was superior to its prior proposals because the
proportion of cash to be received by the shareholders of East Ridge was
significantly higher than in the prior proposals. The East Ridge Board
approved the proposal as described and recommended its acceptance by the East
Ridge shareholders. The East Ridge Board further authorized the executive
officers, with the advice of counsel, to negotiate, execute and deliver for and
on behalf of East Ridge a definitive agreement with respect to the proposal.
The East Ridge Board discussed the advisability of retaining a financial
advisor to assist it with respect to the proposed transaction and to
render an opinion as to its fairness from a financial point of view to the
unaffiliated shareholders of East Ridge. However, the East Ridge Board
determined that it was not necessary to engage a financial advisor for such
purpose since the East Ridge Board had previously retained Sheshunoff as its
financial advisor and Sheshunoff to its satisfactory had not been able to
obtain any acquisition proposals superior to the Cornerstone proposal which is
valued at $6.125 million, exclusive of amounts paid to Mr. Young under his
Consulting Agreement. Additionally management of East Ridge conducted, or
caused to be conducted, a due diligence investigation of the Cornerstone loan
and securities portfolios to its satisfaction.
The East Ridge Board determined that the Merger is fair to and in the best
interest of East Ridge and its unaffiliated shareholders despite the fact that
David E. Young, the principal shareholder of East Ridge, negotiated the
transaction and negotiated favorable terms for himself, including a consulting
arrangement and the right to require New Cornerstone to redeem shares of New
Cornerstone Common Stock which he receives in the Merger, that do not apply to
unaffiliated East Ridge shareholders. For information on the interests of
certain officers and directors of East Ridge, including Mr. Young, in the
Merger, see" - Interests of Certain Persons in the Merger."
The transaction was publicly announced on Sunday, February 16, 1997, in the
Chattanooga Free Press and the Merger Agreement was formally approved and
adopted by the Cornerstone Board at its March meeting.
The Cornerstone Board approved the Merger Agreement on March 18, 1997 and
recommended its approval by the Cornerstone shareholders. On March 18, 1997,
East Ridge, Bank of East Ridge and Mr. Young entered into the Merger Agreement
with Cornerstone, subject to East Ridge Board approval, and terminated the
earlier Stock Purchase Agreement between Cornerstone and Mr. Young. At a
meeting held on March 24, 1997, the East Ridge Board approved the Merger
Agreement, effective March 18, 1997 and recommended its approval by the East
Ridge shareholders.
Reasons for the Merger -- Cornerstone. In reaching its determination that
the Merger and Merger Agreement are fair to, and in the best interest of,
Cornerstone and its shareholders, the Cornerstone Board consulted with its
legal and financial advisers, as well as with Cornerstone management, and
considered a number of factors, including, without limitation, the following:
A. the Cornerstone Board's review, based in part on the presentation by
Cornerstone management regarding its due diligence of East Ridge, of the
business, operations, earnings and financial conditions of East Ridge on both a
historical and prospective basis, the enhanced opportunities for operating
efficiencies (particularly in terms of integration of operations, data
processing and support functions, although the Cornerstone Board did not
quantify such anticipated operating efficiencies) that could result from the
Merger, the enhanced opportunities for growth that the Merger would make
possible and the respective contributions the parties would bring to a combined
institution;
B. the Cornerstone Board's belief, based upon an analysis of the anticipated
financial effects of the Merger, that upon consummation of the Merger, New
Cornerstone and its banking subsidiary would be well capitalized institutions,
the financial positions of which would be in excess of all applicable
regulatory capital requirements;
C. the Cornerstone Board's belief that, in light of the reasons discussed
above, East Ridge was the most attractive choice as a long term affiliation
partner of Cornerstone;
D. the expectation that the Merger will generally be a tax-free transaction
of Cornerstone and its shareholders to the extent such shareholders receive
shares of New Cornerstone Common Stock. (See "Certain Federal Income Tax
Consequences");
E. the current and prospective economic and regulatory environment and
competitive constraints facing the banking and financial institutions in
Cornerstone's market area; and
F. the recent business combinations involving financial institutions, either
announced or completed, during the past year in the United States, the State of
Tennessee and contiguous states and the effect of such combinations on
competitive conditions in Cornerstone's market area.
- 17 -
<PAGE> 31
The Cornerstone Board did not assign any specific or relative weight to
the foregoing factors in their considerations.
Reasons for the Merger -- East Ridge.
The East Ridge Board believes that the transaction contemplated in the
Merger Agreement is in the best interests of all the shareholders of East
Ridge, including the unaffiliated shareholders, and that it reflects a fair
price from a financial stand point for East Ridge as a whole, particularly when
compared to other proposals received in the past despite the fact that David E.
Young the principal shareholder of East Ridge, negotiated the transaction and
negotiated favorable terms for himself, including a consulting arrangement and
the right to require New Cornerstone Common Stock which he receives in the
Merger, that do not apply to unaffiliated East Ridge shareholders. For
information on the interests of certain officers and directors of East Ridge,
including Mr. Young, in the Merger, see" -- Interest of Certain Persons in the
Merger."
The Merger enables East Ridge to remain a part of a community
institution bank dedicated to the service of customers in the Hamilton
County/North Georgia market. The East Ridge Board believes that the Merger
will also result in a more certain future for current employees of Bank of
East Ridge.
Recommendation of the East Ridge Board and the Cornerstone Board.
The Boards of Directors of both East Ridge and Cornerstone have approved
the Merger Agreement and both recommend that the respective shareholders of
East Ridge and Cornerstone vote FOR approval of the Merger Agreement.
David E. Young beneficially owns 76,139 shares of East Ridge Common Stock,
representing 69.8% of the outstanding shares and has agreed to vote all such
shares in favor of the Merger. Accordingly, approval of the Merger Agreement by
the shareholders of East Ridge is assumed.
OPINION OF CORNERSTONE FINANCIAL ADVISER
Cornerstone retained Mercer to render its opinion as to the fairness, from
a financial point of view, to the holders of Cornerstone Common Stock of the
consideration to be paid in the Merger. In connection with this engagement,
Mercer evaluated the financial terms of the Merger, but was not asked to, and
did not recommend the specific ratio of exchange between East Ridge and
Cornerstone common stocks and did not assist in the Merger negotiations. The
ratio of exchange was determined by the East Ridge and Cornerstone Boards of
Directors after arm's length negotiations. Cornerstone did not place any
limitations on the scope of Mercer's investigation or review.
Mercer is a national valuation consulting and transaction advisory firm
which renders independent valuations and related financial advisory services,
including the issuance of fairness opinions for mergers and acquisitions, to
financial institutions and businesses throughout the United States. Mercer was
formed in 1982 and was selected by the Cornerstone Board based upon Mercer's
extensive experience of preparing valuations, rendering fairness opinions, and
facilitating mergers by acting as transaction advisors to financial
institutions.
Mercer has provided the Cornerstone Board with a fairness opinion. THE
FULL TEXT OF THE OPINION LETTER OF MERCER, DATED APRIL 25, 1997, WHICH SETS
FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITATIONS ON THE
REVIEW PERFORMED, IS ATTACHED AS APPENDIX B. THE SUMMARY OF THE OPINION OF
MERCER SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE OPINION.
Mercer did not compile nor audit Cornerstone's or East Ridge's financial
statements, nor independently verify the information reviewed. Mercer relied
upon such information as being complete and accurate in all material respects.
Mercer did not make an independent evaluation of the loan portfolio or the
adequacy of the loan loss reserve, nor did it make specific evaluations of
other assets or liabilities of either company. Mercer's opinion does not
constitute a recommendation to any shareholder as to how the shareholder should
vote on the Merger. Mercer did not express an opinion as to the prices at
which any security of East Ridge, Cornerstone or New Cornerstone might trade in
the future.
Mercer considered the following key issues in rendering the
fairness opinion: (i) terms of the Merger Agreement; (ii) an analysis of the
reasonableness of the proposed consideration which will be paid to East Ridge
shareholders; (iii) an analysis of the estimated pro forma changes in the
combined entities' balance sheet and income statement, book value per share,
earnings per share, and dividends per share from the perspective of the
Cornerstone shareholders based upon financial information as of March 31, 1997;
(iv) the tax-free nature of the transaction for Cornerstone shareholders with
respect to the New Cornerstone Common Stock; and (v) consideration of the
ability of the Merger to advance Cornerstone's business plan;
Transaction Overview
Among other things, the Merger Agreement provides for the following:
(i) Cornerstone will merge into Bank of East Ridge with Bank of East Ridge as
the surviving corporation. At closing, Bank of East Ridge will amend and
restate its charter and change its name to "Cornerstone Community Bank."
(ii) East Ridge will amend its charter and adopt bylaws, both of which are
substantially similar to those currently in effect for Cornerstone, to increase
its authorized shares to 1,500,000, reduce the par value from $10.00 per share
to $1.00 per share, change the name of East Ridge to "Cornerstone Bancshares,
Inc." and
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<PAGE> 32
include other provisions satisfactory to Cornerstone. The individuals serving
on the Cornerstone Board prior to the merger will comprise the board of
directors of New Cornerstone and Bank of East Ridge subsequent to the Merger.
(iii) Cornerstone shareholders will receive one share of New Cornerstone Common
Stock for each share of Cornerstone Common Stock. In addition, Cornerstone
shareholders will receive a warrant to purchase additional New Cornerstone
Common Stock for $12 per share if exercised by February 8, 1998 and $15 per
share if exercised by February 8, 2001. It is anticipated that New Cornerstone
shareholders will exercise approximately 180,000 of the outstanding New
Cornerstone Warrants at closing, the effect of which will be to increase
New Cornerstone's capital by $2.2 million.
(iv) East Ridge shareholders will receive a total consideration of $6,125,000,
payable in cash of $56.1776 per existing share of East Ridge Common Stock, or
New Cornerstone Common Stock based upon the conversion ratio of $56.1776
divided by $12 per each share of existing East Ridge Common Stock. A condition
of the Merger is that East Ridge shareholders owning at least 76,321 shares
(70%) elect the cash option. If East Ridge shareholders elect to receive cash
greater than 70%, then the proceeds will be reduced on a pro rata basis with
the balance payable in the form of New Cornerstone Common Stock. In the event
that East Ridge shareholders elect to receive less than 70% cash, then
Cornerstone may terminate the Merger Agreement.
(v) David E. Young, Chairman of the Board of Bank of East Ridge and a
director of East Ridge and East Ridge's largest shareholder with a 69.8%
interest, has agreed to exchange for cash at least 70% of the shares he owns.
(vi) David E. Young has also agreed to be bound by a five year consulting
agreement for which he will receive consideration of $75,000 annually. In
addition, change-of-control benefits totaling up to approximately $300,000 may
be paid to three Bank of East Ridge officers under certain conditions.
The proposed purchase price for East Ridge is $6,125,000, or 12.6x East
Ridge's reported 1996 net income and 200% of book value as of December 31,
1996. As noted above, Mr. Young will receive $75,000 per year for five years
in connection with a consulting arrangement part of a non-compete agreement.
Based upon a discount rate of 7%, the present value of the after-tax payments
is about $191,000. In addition, employment agreement payments may be incurred
for three officers, if they elect to terminate their relationship with Bank
of East Ridge within 30 days of the consummation of the merger. The after-tax
liability of the payments approximates $189,000.
Valuation Analysis
The valuation analysis of East Ridge is based upon an analysis of the
Comparable Transactions Method, involving the sale of banks and a Discounted
Cash Flow Method. It should be emphasized that each analysis must be
considered in its entirety and that the overall fairness analysis is based upon
all factors considered, and not upon any particular valuation method.
Comparable Transaction Analysis. The comparable transaction method seeks
to develop an indication of value for a subject company by analyzing prices
paid for similar institutions which have been acquired. With regard to the
banking industry, most transactions are measured in terms of price/book ratios
("P/B"),price/tangible book ratios ("P/TB") and price/earnings ratios ("P/E").
In addition, some analysts also consider pricing multiples for price/assets
("P/A"), price/deposits ("P/D") and tangible book value premium/core deposits
("TBP/CD").
Although the P/B ratio tends to be the more widely quoted pricing
multiple, the P/E ratio is generally more important, because acquirors are
most concerned with the target's earning capacity. Also, the market's
relative pricing of the buyer (in relation to earnings) will dictate the size
of an offer before earnings dilution becomes an issue.
With regard to banks, acquisition pricing in terms of P/E multiples
during the past ten years have been in the general vicinity of 14x to 16x
earnings, though there has been some upward pressure on multiples during 1996.
- 19 -
<PAGE> 33
It should be noted that P/E ratios tend to vary outside this range when a
seller's earnings are extremely high or low relative to the industry. The
markets tend to maintain or lower P/E for high return on equity ("ROE") banks,
keeping other relative measures of value in perspective. Very high P/E ratios
are often seen when banks have temporarily depressed earnings and the market
expects future earnings to recover to more normal levels.
In addition, P/B multiples will vary depending upon the amount of
equity employed by the seller. P/B ratios tend to decline as equity rises (and
ROE declines) and increase when equity decreases (and ROE rises). In effect,
excess equity is often priced dollar-for-dollar by acquirors.
With regard to East Ridge, Mercer reviewed prices paid for banks which
have been acquired as compiled by SNL Securities, LC, an analyst specializing
in securities of financial institutions. The data was divided into six groups
with average and median P/E, P/B, P/TB, P/A, and TBP/CD ratios calculated for
calendar years 1992-1996: (i) all U.S. banks; (ii) Southeast based banks; (iii)
banks based in Alabama, Georgia and Tennessee; (iv) banks with $40 million to
$450 million of total assets and an equity/assets ratio of 9.0% to 13.0%; (v)
banks which were acquired for a combination of cash, common stock and other
securities; and, (vi) banks which were acquired for cash only.
The table below presents a summary of the median P/E ratios and average
P/B, P/TB, P/A and TBP/CD ratios for the six acquisition groups as applied to
East Ridge's financial information for the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
1996 Transaction Multiples
--------------------------------------------------------
Price/ Price/ Price/ Price/ Tng Bk Pr/
Earnings Book Tng Book Assets Core Dep
---------- -------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
National Averages 16.6 195% 199% 18.4% 11.2%
Southeast Averages 18.9 197% 202% 19.4% 12.3%
Al, GA and TN Averages 14.8 176% 182% 17.6% 10.3%
Small Bank Averages 16.2 182% 184% 18.8% 11.1%
"Mixture" Payment Avg 17.1 197% 206% 17.8% 11.8%
Cash Payment Averages 14.5 170% 173% 16.2% 8.5%
-------------------------------------------------------------
HIGH 18.9 197% 206% 19.4% 12.3%
AVERAGE 16.4 186% 191% 18.0% 10.9%
MEDIAN 16.4 189% 192% 18.1% 11.2%
LOW 14.5 170% 173% 16.2% 8.5%
=============================================================
- -----------------------------------------------------------------------------
Vs. East Ridge Pricing 12.6 201% 201% 13.8% 8.1%
=============================================================================
<CAPTION>
Implied Acquisition Values
(In thousands)
--------------------------------------------------------------------
Price/ Price/ Price/ Price/ Tang Bk Prem/
Earnings Book Tangible Book Assets Core Deposits
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
National Averages $8,068 $5,942 $6,064 $8,164 $7,303
Southeast Averages $9,185 $6,003 $6,155 $8,608 $7,721
Al, GA and TN Averages $7,193 $5,363 $5,546 $7,809 $6,961
Small Bank Averages S7,873 $5,546 $5,606 $8,341 $7,265
"Mixture" Payment Avg $8,311 $6,003 $6,277 $7,898 $7,531
Cash Payment Averages $7,047 $5,180 $5,271 $7,188 $6,277
---------------------------------------------------------------------------
HIGH $9,185 $6,003 $6,277 $8,608 $7,721
AVERAGE $7,946 $5,673 $5,820 $8,001 $7,176
MEDIAN $7,971 $5,744 $5,835 $8,031 $7,284
LOW $7,047 $5,180 $5,271 $7,188 $6,277
===========================================================================
</TABLE>
The analysis indicates an overall range of estimated value of $5.2
million to $9.2 million, with a range based upon averages only of $5.7 million
to $8.0 million. The acquisition pricing for East Ridge falls within the
range.
Discounted Cash Flow Analysis. A discounted cash flow ("DCF") analysis was
also conducted to develop an estimate of value based upon the hypothetical cash
flow that East Ridge could produce for a controlling shareholder. Value derived
using a DCF analysis is equal to the present value of any interim cash flows
(i.e., dividends) and the present value of a projected terminal value (i.e., the
estimated value of the subject at the end of the projection period). In
preparing its analysis, Mercer assumed that East Ridge operated "as is" without
considering any potential expense economies or revenue enhancements that an
acquiror might achieve. Mercer assumed a deposit and asset growth rate of 5%
per year, less than that which has been recorded in recent years, and a slight
improvement in profitability from a return on assets ("ROA") of 1.15% in 1996 to
about 1.20% during the period. Mercer does not represent or warrant that East
Ridge would achieve the results assumed in Mercer's analysis.
- 20 -
<PAGE> 34
Interim shareholder cash flows, consisting of dividends, are constructed
so that East Ridge's consolidated equity/assets ratio of approximately 7.0% is
maintained. Accordingly, the projections assume that an acquiror could
distribute about two-thirds of earnings each year to maintain the targeted
capital ratio.
The terminal value is derived by applying a P/E multiple to projected 2001
net income. The cash flows were then discounted to their present values at a
risk adjusted rate (assumed to be in the vicinity of 14%-15% based upon current
U.S. Treasury rates and an appropriate premium). A summary of the results is
presented in the table below.
SENSITIVITY ANALYSIS
PRICE/EARNINGS MULTIPLE vs. DISCOUNT RATE
Terminal Value Multiple
(In thousands)
<TABLE>
<CAPTION>
12.0 13.0 14.0 15.0 16.0 17.0
<S> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------
12.O% $5,976 $6,350 $6,723 $7,097 $7,471 $7,845
--------------------------------------------------------------------------------
13.O% $5,743 $6,101 $6,458 $6,816 $7,174 $7,531
--------------------------------------------------------------------------------
Discount 14.0% $5,523 $5,865 $6,207 $6,549 $6,891 $7,233
Rate
--------------------------------------------------------------------------------
15.0% $5,313 $5,640 $5,968 $6,295 $6,623 $6,950
--------------------------------------------------------------------------------
16.0% $5,113 $5,426 $5,740 $6,054 $6,367 $6,681
--------------------------------------------------------------------------------
17.0% $4,923 $5,223 $5,524 $5,824 $6,125 $6,425
--------------------------------------------------------------------------------
</TABLE>
The center of the matrix reflects a reasonable range based upon a
discount rate of 14% to 15% and a terminal value based upon a P/E multiple of
14x to 15x. The indicated range is $6.0 million to $6.5 million.
Pro Forma Analysis
Another important element of the overall fairness analysis is the expected
impact that the transaction will have on the combined banks' balance sheet,
earnings, and per share data. Mercer does not represent or warrant that its
pro forma analysis would reflect that which is presented elsewhere in this
Joint Proxy Statement/Prospectus. Mercer's analysis indicated the following:
(i) The combined balance sheet will include approximately $82 million in
assets, which would be supported with approximately $9.4 million in equity
capital and $7.2 million in tangible equity capital. The pro forma stated
equity-to-assets and tangible equity-to-tangible assets ratios would be,
respectively, 11.4% and 9.0%.
(ii) Approximately $2.2 million of goodwill will be created, resulting in an
annual amortization expense of about $150,000 (assuming a 15 year straight line
amortization).
(iii) Cornerstone's pro forma earnings would increase from $44,000 as budgeted
for 1997 to over $340,000 after considering the impact of the foregone
interest income on cash paid to East Ridge shareholders, goodwill amortization,
and the increase in depreciation from the anticipated write-up of Bank of East
Ridge's main office. Pro forma earnings will potentially be greater once
certain back office operations are combined. Further, Cornerstone's business
plan projected $160,000 in expenses in 1997 and another $240,000 in expenses in
1998 for the opening of a second office in the Hamilton Mall/Gunbarrel Road
area. Bank of East Ridge's supermarket branch in the area will allow
Cornerstone management to forego constructing a traditional branch in the area
for an undetermined period of time.
- 21 -
<PAGE> 35
(iv) Book value per share is projected to increase about a $1.00 per share;
however, tangible book value per share will decline by approximately $1.35 per
share. As the goodwill is amortized, the difference between stated and
tangible book value per share will narrow.
(v) Reported earnings per share and cash earnings per share (reported
earnings per share plus goodwill amortization) are projected to exceed what
they otherwise would have been. The enhancement in earnings and per share
earnings is a key element in the fairness analysis because of the impact
acceleration of the business plan (i.e., profitability) should have on the
creation of shareholder value.
The Exchange Ratio
Although the transaction essentially consists of a cash purchase, a
portion of the consideration paid will consist of New Cornerstone Common Stock
issued to East Ridge shareholders. The exchange ratio is based upon a value of
$12.00 per share for Cornerstone (i.e., $56.1776 / $12.00). Cornerstone
completed its initial stock offering in early 1996 when 590,130 shares were
sold for a price of $10.00 per share. In addition, each share included a
non-detachable warrant, which can be exercised before February 1998 for an
additional share at $12.00 per share, or $15.00 per share for the following
three years before expiring.
There has been limited trading in Cornerstone's shares since the original
share offering, with all transactions but one occurring at $12.00 per share.
The lone exception was one trade of 2,500 shares which occurred at $12.50 per
share. If the exchange ratio were based upon $12.50 per share, then East Ridge
shareholders would receive approximately 147,000 shares versus 153,000 as
provided in the Merger Agreement. Cornerstone shareholders would still receive
590,130 shares of New Cornerstone Common Stock, plus warrants for all
unexercised warrants.
Mercer also analyzed the implied price multiples for Cornerstone Common
Stock. At $12.00 per share, the shares are presently "priced" at 132% of book
value, 132% of tangible book value, 150x estimated 1997 earnings, and 20.3x
projected 1998 earnings. Though the P/B multiple is below median P/B ratios
for publicly traded banks, the P/E ratios are well over the public multiples.
Analysts and investors typically place the greatest emphasis on P/E ratios to
determine the relative attractiveness of a stock.
Based upon the above, the exchange ratio appears to be reasonable from
the perspective of Cornerstone shareholders.
Statement of Disinterestedness
For rendering its opinion, Cornerstone paid Mercer a professional fee of
$15,000 plus out-of-pocket expenses. Neither Mercer nor its principals own an
interest in the securities of East Ridge or Cornerstone.
TERMS OF THE MERGER
Merger Consideration Available to East Ridge Shareholders. At the
Effective Time, each share of East Ridge Common Stock outstanding prior to the
Effective Time will be converted into a right to receive cash and/or New
Cornerstone Common Stock. Shareholders of East Ridge who
- 22-
<PAGE> 36
do not exercise dissenters' rights may elect to receive New Cornerstone Common
Stock and/or cash for their shares of East Ridge common stock. The number of
shares of New Cornerstone Common Stock received in exchange for East Ridge
Common Stock will be based on an exchange ratio determined by multiplying the
number of shares of East Ridge Common Stock to be exchanged by $56.1772 and
then dividing by $12.00 (the "ERB Exchange Ratio"). The $12.00 per share price
for New Cornerstone Common Stock was based on the per share price of trades of
Cornerstone Common Stock which management of Cornerstone was aware of prior to
the execution of the Merger Agreement. Shareholders of East Ridge who exchange
their shares for cash will receive $56.1772 per share. Accordingly, each share
of East Ridge Common Stock will have converted into the right to receive 4.6814
shares of New Cornerstone Common Stock. However, the aggregate amount of cash
to be delivered to the shareholders of East Ridge will not exceed $4,287,500.
To the extent shareholders of East Ridge elect to receive in the aggregate more
than $4,287,500, cash will be paid on a pro-rata basis to those East Ridge
shareholders electing to receive cash.
Although the Merger Agreement provides that in the event shareholders of
East Ridge elect less than $2,900,000 in cash, Cornerstone may terminate the
Merger Agreement, such eventuality is not likely to occur in that David E.
Young, who beneficially owns 76,139 shares of East Ridge Common Stock, or
approximately 69.8% of the outstanding shares of East Ridge has notified
Cornerstone that he intends to exchange at least 70% of the shares of East Ridge
Common Stock he owns for cash in the aggregate amount of $2,994,076. However,
in the event the elections of the East Ridge shareholders, including Mr. Young,
for cash exceed $4,287,500, Mr. Young's election will be pro rated equally
with all other East Ridge shareholders who have elected cash.
The Merger will result in a change in control of the ownership and
management of East Ridge. Upon completion of the Merger, if all of the East
Ridge shareholders except Mr. Young who has agreed to exchange a certain
portion of his shares for cash, elect to receive all of the remaining 260,909
shares of New Cornerstone Common Stock issuable in the Merger, shareholders of
East Ridge will own a maximum of 20.6% of the outstanding shares of New
Cornerstone Common Stock and Cornerstone shareholders will own a 79.4% of the
outstanding shares of New Cornerstone Common Stock. The officers and directors
of Cornerstone will continue as the officers and directors of New Cornerstone.
Merger Consideration Available to Cornerstone Shareholders. At the
Effective Time, each share of Cornerstone Common Stock outstanding prior to the
Effective Time will be converted into a right to receive one share of New
Cornerstone Common Stock and one New Cornerstone Warrant exercisable for one
share of New Cornerstone Common Stock for $12 per share if exercised by
February 8, 1998 and for $15 per share if exercised by February 8, 2001. New
Cornerstone Warrants exercisable for the purchase of up to 590,130 shares of
New Cornerstone Common Stock are issuable in the Merger.
The Merger will result in a change in control of the ownership and
management of East Ridge. Upon completion of the Merger, Cornerstone
shareholders will own a minimum of 79.4% of the outstanding shares of New
Cornerstone Common Stock and the officers and directors of Cornerstone will
continue as the officers and directors of New Cornerstone.
Fractional Shares. No fractional shares of New Cornerstone Common Stock
will be issued in connection with the Merger. In lieu of fractional shares,
East Ridge will make a cash payment equal to the fractional interest which an
East Ridge shareholder would otherwise receive multiplied by $56.1772. The
fractional interest will be determined after combining all shares owned by such
East Ridge shareholder.
ELECTION OF FORM OF MERGER CONSIDERATION
As promptly as practicable after the Merger, New Cornerstone will provide
letters of transmittal to shareholders of East Ridge for the purpose of
exchanging their certificates of East Ridge Common Stock for New Cornerstone
Common Stock and/or cash as elected by the shareholder. To the extent
shareholders of East Ridge elect to receive New Cornerstone Common Stock, such
election will be satisfied. The amount of cash received by an East Ridge
shareholder is subject to the availability of cash to the extent shareholders
of East Ridge elect more than $4,287,500 in cash. In such event, the amount of
cash up to the maximum amount of $4,287,500 will be pro-rated among all
shareholders of East Ridge, including Mr. Young, requesting cash. In the event
all of the shareholders of East Ridge elect to receive cash for all of their
shares of East Ridge, each shareholder would receive 70% of his Merger
consideration in cash and 30% in New Cornerstone Common Stock.
As promptly as practicable after the Merger, New Cornerstone will provide
letters of transmittal to shareholders of Cornerstone for the purpose of
exchanging their certificates of Cornerstone Common Stock and their warrants
for certificates representing New Cornerstone Common Stock and New Cornerstone
Warrants. See "The Merger -- Surrender of Certificates."
ADVANTAGES AND DISADVANTAGES OF FORM OF MERGER CONSIDERATION
To the extent shareholders of East Ridge elect New Cornerstone Common
Stock, they will not recognize gain or loss upon the receipt of New Cornerstone
Common Stock, except to the extent of any cash received in lieu of fractional
shares. To the extent shareholders of East Ridge elect cash, they will
recognize gain or loss as a result of the Merger. See "The Merger -- Certain
Federal Income Tax Consequences."
Additionally, there is no market for the New Cornerstone Common Stock and
there is no assurance that an active and liquid market will develop.
Therefore, East Ridge shareholders who elect to receive New Cornerstone Common
Stock and who desire to liquidate their investment may be unable to do so. See
"Risk Factors."
EFFECTIVE TIME
The Effective Time of the Merger will be 5:01 p.m., Eastern time, on the
later to occur of the acceptance for filing by the Secretary of State of the
State of Tennessee of articles of merger filed in accordance with the TBA, or
on such later date as the articles of merger may specify. Unless otherwise
mutually agreed upon by East Ridge and Cornerstone, the Merger will occur on
the last business day of the month after all conditions contained in the Merger
Agreement have been satisfied or waived, including receipt of all regulatory
approvals and termination of all statutory waiting periods.
SURRENDER OF CERTIFICATES
As promptly as practicable after the Merger, New Cornerstone,
acting in the capacity of exchange agent for both East Ridge and Cornerstone
(the "Exchange Agent"), will mail to each former holder of record of
Cornerstone Common Stock a form of letter of transmittal, together with
instructions for the exchange of such holder's certificates representing shares
of Cornerstone Common Stock for certificates representing shares of New
Cornerstone Common Stock and New Cornerstone Warrants. The Exchange Agent will
also mail to each holder of record of East Ridge Common Stock a form of letter
of transmittal, together with instructions for the exchange of such holder's
certificates representing shares of East Ridge Common Stock for certificates
representing shares of New Cornerstone Common Stock and/or cash.
HOLDERS OF CORNERSTONE COMMON STOCK AND EAST RIDGE COMMON STOCK SHOULD
HOLD THEIR CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND
INSTRUCTIONS FROM THE EXCHANGE AGENT.
Upon surrender to the Exchange Agent of one or more certificates for
Cornerstone Common Stock together with a properly completed letter of
transmittal, there will be issued and mailed to the holder of Cornerstone
Common Stock surrendering such items a certificate or certificates representing
the number of shares of New Cornerstone Common Stock and the number of New
Cornerstone Warrants to which such holder is entitled.
- 23 -
<PAGE> 37
Upon surrender to the Exchange Agent of one or more certificates for East
Ridge Common Stock together with a properly completed letter of transmittal,
there will be issued and mailed to the holder of East Ridge Common Stock
surrendering such items a certificate or certificates representing the number
of shares of New Cornerstone Common Stock to which such holder is entitled and,
where applicable, a check for the amount cash if the holder has elected to
receive cash.
No dividend or other distribution payable after the Merger with
respect to either the Cornerstone Common Stock or the East Ridge Common Stock
will be paid to the holder of any unsurrendered certificate until the holder
surrenders such certificate(s), at which time the holder will be entitled to
receive all previously withheld dividends and distributions, without interest.
After the Merger, there will be no transfers on either East Ridge's
or Cornerstone's stock transfer books of shares of either East Ridge Common
Stock or Cornerstone Common Stock issued and outstanding at the Merger. If
certificates representing shares of either East Ridge Common Stock or
Cornerstone Common Stock are presented for transfer after the Merger, they will
be canceled and exchanged for the shares of New Cornerstone Common Stock or
cash deliverable in respect thereof as determined in accordance with the
provisions of the Merger Agreement.
Neither East Ridge nor Cornerstone nor any other person will be liable to
any former holder of Cornerstone Common Stock or East Ridge Common Stock for
any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
If a certificate for Cornerstone Common Stock or for East Ridge Common
Stock has been lost, stolen or destroyed, East Ridge will issue the
consideration properly payable in accordance with the Merger Agreement upon
receipt of appropriate evidence as to such loss, theft or destruction,
appropriate evidence as to the ownership of such certificate by the claimant,
and appropriate and customary indemnification.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of Cornerstone and East Ridge to effect the
Merger are subject to the satisfaction prior to the Merger of the following
conditions: (a) the Merger Agreement, the Merger and the transactions
contemplated thereby shall have been approved by the requisite vote of the
shareholders in accordance with applicable law; (b) the procurement of approval
of the Merger Agreement and the transactions contemplated thereby by the TDFI
and the FDIC, and the expiration of any statutory waiting periods; (c) the
procurement of all other regulatory consents and approvals which are necessary
to the consummation of the transactions contemplated by the Merger Agreement;
provided, however, that no approval or consent shall be deemed to have been
received if it shall include any conditions or requirements which would reduce
the benefits of the transactions contemplated by the Merger Agreement to such a
degree that Cornerstone or East Ridge (as to any condition or requirement which
directly adversely affects the shareholders of East Ridge) would not have
entered into the Merger Agreement had such conditions or requirements been
known at the time of execution of the Merger Agreement; (d) the satisfaction
of all other requirements prescribed by law which are necessary to the
consummation of the transactions contemplated by the Merger Agreement; (e) no
party to the Merger Agreement shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger; (f) no statute, rule, regulation,
order, injunction or decree shall have been enacted, entered, promulgated or
enforced by any governmental authority which prohibits, restricts or makes
illegal consummation of the Merger or which imposes restrictions, conditions or
requirements on consummation of the Merger which would reduce the benefits of
the Merger to such a degree that Cornerstone or East Ridge (as to any
restriction, condition or requirement which directly adversely affects the
shareholders of East Ridge) would not have entered into the Merger Agreement
had such conditions or requirements been known at the date of execution of the
Merger Agreement; (g) the Registration Statement shall have become effective
and no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
initiated or threatened by the Securities Exchange Commission;
- 24 -
<PAGE> 38
(h) the receipt of all state securities laws and "Blue Sky" permits and other
authorizations necessary to consummate the transactions contemplated hereby;
and (i) the Merger shall have occurred on or before December 31, 1997.
The obligation of Cornerstone to effect the Merger shall be subject to
the satisfaction prior to the Merger of the following additional
conditions: (a) Cornerstone and its directors and officers shall have received
from East Ridge's and Bank of East Ridge's independent certified public
accountants "cold comfort" letters, dated (i) the date of the mailing of the
Proxy Statement/Prospectus to East Ridge's shareholders and (ii) shortly prior
to the Merger, with respect to certain financial information regarding
East Ridge and Bank of East Ridge in the form customarily issued by such
accountants at such time in transactions of this type; (b) Cornerstone shall
have received an opinion of East Ridge's, Bank of East Ridge's and Young's
counsel; (c) each of the representations, warranties and covenants contained in
the Merger Agreement of East Ridge, Bank of East Ridge, and Young, in all
respects, be true on, or complied with by, the date of the Merger as if made on
such date (or on the date when made in the case of any representation or
warranty which specifically relates to an earlier date) except (i) for breaches
which singly or in the aggregate would not have a Material Adverse Effect (as
defined in the Merger Agreement) and (ii) as to representations, warranties or
covenants contained in the Merger Agreement of East Ridge, Bank of East Ridge,
and Young which do not specifically refer to Material Adverse Effect, for
breaches which are not material and Cornerstone shall have received a
certificate signed by the Chief Executive Officer or Chief Financial Officer of
East Ridge to such effect; (d) no litigation or proceeding is pending which (i)
has been brought against Cornerstone or East Ridge or any of their subsidiaries
by any governmental agency seeking to prevent consummation of the transactions
contemplated hereby or (ii) in the reasonable judgment of the Chief Executive
Officer of Cornerstone is likely to have a Material Adverse Effect on East
Ridge; (e) Cornerstone shall have conducted a due diligence review of East
Ridge, the results of which shall be satisfactory to the Cornerstone Board; (f)
the East Ridge shareholders shall have elected to exchange East Ridge Common
Stock for cash of not less than $2,900,000; and (g) New Cornerstone shall have
entered into a consulting agreement with Young.
The obligation of East Ridge to effect the Merger is subject to the
satisfaction at or prior to the Merger of the following additional
conditions: (a) East Ridge and Bank of East Ridge and their directors and
officers shall have received from Cornerstone's independent certified public
accountants "cold comfort" letters, dated (i) the date of the mailing of the
Joint Proxy Statement/Prospectus to Cornerstone's shareholders and (ii) shortly
prior to the Merger, with respect to certain financial information regarding
Cornerstone in the form customarily issued by such accountants at such time in
transactions of this type; (b) East Ridge and Bank of East Ridge shall have
received an opinion of Cornerstone's counsel; (c) East Ridge shall have
received an opinion regarding certain tax issues of Cornerstone's counsel; (d)
each of the representations, warranties and covenants contained in the Merger
Agreement of Cornerstone shall, in all respects, be true on, or complied with
by, the date of the Merger as if made on such date (or on the date when made in
the case of any representation or warranty which specifically relates to an
earlier date) except (i) for breaches which singly or in the aggregate would
not have a Material Adverse Effect and (ii) as to representations, warranties
or covenants of Cornerstone which do not specifically refer to Material Adverse
Effect, for breaches which are not material and East Ridge shall have received
a certificate signed by the Chief Executive Officer or Chief Financial Officer
of Cornerstone to such effect; and (e) no litigation or proceeding is pending
which (i) has been brought against East Ridge or Cornerstone or any of their
subsidiaries by any governmental agency, seeking to prevent consummation of the
transactions contemplated hereby or (ii) in the reasonable judgment of the
Chief Executive Officer of East Ridge will have a Material Adverse Effect on
Cornerstone; and (f) East Ridge shall have conducted a due diligence review of
Cornerstone, the results of which shall be satisfactory to the East Ridge
Board.
CONDUCT OF BUSINESS PENDING MERGER
The Merger Agreement contains certain restrictions on the conduct of East
Ridge's and Cornerstone's businesses pending consummation of the Merger. In
particular, the Merger Agreement provides that neither party
- 25 -
<PAGE> 39
may without the prior written consent of the other, among other things, (a)
make, declare or pay any dividend on its common stock or declare or make any
distribution on, or directly or indirectly combine, redeem, reclassify,
purchase or otherwise acquire, any shares of its capital stock (other than in a
fiduciary capacity or in respect of a debt previously contracted in good faith)
or authorize the creation or issuance of or issue or sell or permit any
subsidiary to issue or sell any additional shares of its capital stock, or any
options, calls or commitments relating to its capital stock, or any securities,
obligations or agreements convertible into or exchangeable for, or giving any
person any right to subscribe for or acquire, shares of its capital stock or
the capital stock of any subsidiary; (b) merge or consolidate or permit any
subsidiary to merge or consolidate with any other entity or engage in any
similar transaction or sell or otherwise dispose of the stock of Bank of East
Ridge; (c) pay any bonus to, or increase the rate of compensation of, any of
its directors, officers or employees or enter into any employment contracts
with any persons; (d) enter into or modify or permit any subsidiary to enter
into or modify (except as may be required by applicable law and except for the
renewal of any existing plan or arrangement in the ordinary course of business
consistent with past practice) any pension, retirement, stock option, stock
purchase, savings, profit sharing, deferred compensation, consulting, bonus,
group insurance or other employee benefit, incentive or welfare contract, plan
or arrangement, or any trust agreement related thereto, in respect of any of
its directors, officers or other employees; (e) except as contemplated by
Sections 1.2 and 5.13 of the Merger Agreement, substantially modify the manner
in which it and/or its subsidiaries have heretofore conducted their business,
taken as a whole, or amend its charter or by-laws; (f) except for transactions
in the ordinary course of its banking business, sell, dispose of or discontinue
or permit any subsidiary to sell, dispose or discontinue any of its business,
assets (including investment securities) or property; (g) except for the
acquisition of loans, investment securities and cash equivalent assets in the
ordinary course of its banking business, acquire (other than through
foreclosure or satisfaction in whole or in part of indebtedness owed to it) any
assets or business that is material to such party; (h) except in the ordinary
course of its banking business, enter into off-balance sheet transactions; (i)
take any other action not in the ordinary course of business of it or its
subsidiaries; (j) make any negative provision to the reserve for possible loan
losses of Bank of East Ridge unless required by a regulatory authority having
jurisdiction; or (k) directly or indirectly agree to take any of the foregoing
actions.
Immediately prior to the Effective Time and subject to the satisfaction
of the conditions precedent to closing, East Ridge shall cause Bank of East
Ridge to declare and pay a dividend to East Ridge at such time and in such
amount as may be requested by Cornerstone. East Ridge shall take and shall
cause Bank of East Ridge to take all appropriate and necessary steps, including
without limitation, obtaining the requisite approval from the TDFI and the FDIC
for the declaration and payment of such dividend.
REGULATORY APPROVALS
The Merger of Cornerstone and Bank of East Ridge is subject to prior
approval of the FDIC and TDFI. Applications for such approval have been filed
with these agencies.
THERE CAN BE NO ASSURANCE THAT THE REGULATORY AUTHORITIES DESCRIBED ABOVE
WILL APPROVE THE MERGER, AND IF THE MERGER IS APPROVED, THERE CAN BE NO
ASSURANCE AS TO THE DATE OF SUCH APPROVAL. THERE CAN ALSO BE NO ASSURANCE THAT
ANY SUCH APPROVALS WILL NOT CONTAIN A CONDITION OR REQUIREMENT WHICH CAUSES
SUCH APPROVALS TO FAIL TO SATISFY THE CONDITIONS TO CONSUMMATION OF THE MERGER
SET FORTH IN THE MERGER AGREEMENT.
NO SOLICITATION
East Ridge is prohibited by the Merger Agreement from soliciting or
knowingly encouraging inquiries or proposals with respect to, or furnishing any
information relating to or participating in any negotiations or discussions
concerning, any acquisition or purchase of all or a material portion of its
assets (whether owned by it directly or owned by any of its subsidiaries), or
of a substantial equity interest in it or any business combination with it or
any of its subsidiaries other than as contemplated by the Merger Agreement.
East Ridge has agreed to notify Cornerstone immediately if any inquiries or
proposals as described above are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated with,
East Ridge or Bank of East Ridge.
- 26 -
<PAGE> 40
WAIVER; AMENDMENT; TERMINATION
Prior to the Merger, any provision of the Merger Agreement may be
(i) waived by the party benefitted by the provision or by both parties or (ii)
amended or modified at any time (including the structure of the transaction) by
an agreement in writing between the parties and approved by the Boards of
Directors (to the extent allowed by law), except that, after the vote by the
shareholders of East Ridge and Cornerstone, the Merger Agreement may not be
amended or revised to reduce the amount or change the form of the consideration
to be received by East Ridge's and Cornerstone's shareholders.
The Merger Agreement may be terminated at any time prior to the Merger,
either before or after its approval by the holders of Cornerstone Common
Stock and East Ridge Common Stock, as follows: (a) by the mutual consent of
Cornerstone and East Ridge, if the Board of Directors of each so determines by
vote of a majority of the members of its entire Board; (b) in the event of the
failure of the shareholders of either Cornerstone or East Ridge to approve the
Merger Agreement by the requisite vote at their respective meetings called to
consider such approval, the Merger Agreement terminates automatically; or (c)
by Cornerstone or East Ridge, if its Board of Directors so determines by vote
of a majority of the members of its entire Board, in the event of a breach by
the other party hereto of any representation, warranty or agreement contained
herein which is not cured or not curable within sixty (60) days after written
notice of such breach is given to the party committing such breach by the other
party hereto which has or will have had a Material Adverse Effect on the
breaching party.
MANAGEMENT AFTER THE MERGER
After the Merger, the directors and officers of Cornerstone will
become the directors and officers of New Cornerstone.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of East Ridge's management and the East Ridge Board have
certain interests in the Merger that are in addition to their interests as
shareholders of East Ridge generally. The East Ridge Board was aware of these
interests and considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby.
Each of David E. Young, James D. Renegar, James R. Young, Jr. and Daniel
O. Crye is a party to a Change-in-Control Protective Agreement and an Executive
Salary Continuation Agreement which provides for certain payments in the event
their employment is terminated under certain circumstances after a change in
control of East Ridge. Additionally, David E. Young will waive his right to
receive severance payments pursuant to the Change-in-Control Protective
Agreement and will enter into a consulting agreement with New Cornerstone
pursuant to which Mr. Young will provide consulting services to New Cornerstone
for a period of five years and for which he will receive $75,000 annually
payable in equal monthly installments. Under the terms of the consulting
agreement, Mr. Young will be available to Cornerstone to consult with it on
general banking matters, marketing issues, customer contacts and personnel and
other management issues. Mr. Young is not required to provide any minimum
amount of such services or work any specific number of hours under such
consulting agreement and is merely to make himself available upon reasonable
notice.
Additionally, Mr. Young is entitled to sell the shares of New Cornerstone
Common Stock he receives in the Merger back to New Cornerstone over a
three-year period at $12.55 (46,745 shares), $14.00 (28,356 shares) and $16.00
(21,756) per share in years 1998, 1999 and 2000, respectively. New Cornerstone
has the option to redeem such shares during the same period at the same prices.
No other East Ridge shareholders who receive shares of New Cornerstone Common
Stock will have the same opportunity to require New Cornerstone to redeem their
shares. New Cornerstone will reimburse Mr. Young for any interest expense he
incurs in connection with the debt he incurred to purchase substantially all of
his shares of East Ridge Common Stock if the Merger does not close by August
12, 1997. Cornerstone is a participant in a $3,750,000 commercial loan to Mr.
Young, the proceeds of which were used to purchase East Ridge Common Stock.
Cornerstone's participation is $750,000. New Cornerstone will also reimburse
Mr. Young for his attorneys fees incurred in connection with the Merger.
Pursuant to the Change-in-Control Protective Agreements (the "Protective
Agreement"), Messrs. Renegar, James R. Young, Jr. and Crye are entitled to
receive an aggregate of up to $300,000 under certain circumstances. However,
it is anticipated that Messrs. Renegar, James R. Young, Jr. and Crye will
continue their employment with Conerstone Community Bank after the Merger and,
accordingly, their current employment agreements will remain in effect.
Nevertheless, each is entitled to severance benefits in the event he elects to
terminate his employment within 30 days after the consummation of the Merger or
within 90 days of the Merger if he terminates his employment for "Good Reason."
"Good Reason" is defined in the Protective Agreement as (i) the requirement
that the employee move his personal residence, or perform his principal
executive functions, more than 30 miles from his primary office as of the date
of the Change in Control; (ii) a reduction of more than 10% in the employee's
base compensation as in effect on the date of the Change in Control; (iii) the
failure by the successor corporation to provide the employee with compensation
and benefits substantially similar to those provided to him by East Ridge; or
(iv) a failure to elect the employee to the board of directors of the successor
corporation if the employee is serving on such board at the time of the Change
in Control. Additionally, the employee is entitled to the severance benefit in
the event his employment is terminated without "Just Cause" as defined in the
Protective Agreement, during the period beginning six months before a Change in
Control and ending on the second anniversary of the Change in Control. David
E. Young will receive $75,000 per year for 5 years under his consulting
agreement in lieu of severance benefits under the Continuation Agreement since
his employment will be terminated as a result of the Merger.See "The Merger --
Interests of Certain Persons in the Merger."
Additionally, Messrs. David E. Young, Renegar and James R. Young are
parties to Executive Salary Continuation Agreements (the "Continuation
Agreement") and Mr. Crye is party to a Survivor Income Agreement, each of which
provide salary continuation benefits in the event the executive remains in the
employ of East Ridge during his lifetime or until retirement at the age of 70.
In the event the employment of the executive is terminated prior to retirement,
the executive is entitled to a certain percentage of the benefits depending on
his length of employment. See "The Merger -- Interests of Certain Persons in
the Merger."
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<PAGE> 41
DISSENTERS' RIGHTS
The following summary of applicable provisions of state law governing the
rights of shareholders is qualified in its entirety by reference to Appendix C.
Any shareholder of East Ridge entitled to vote on the Merger Agreement
has the right to receive payment of the fair value of his shares of East Ridge
Common Stock upon compliance with Sections 48-23-202 and 48-23-204 of the TBCA.
Additionally, Section 45-2-1309 of the TBA provides that shareholders of
Cornerstone have dissenters' rights as provided by the TBCA. The following
discussion is applicable to shareholders of both East Ridge and Cornerstone.
For purposes of the discussion in this section only, East Ridge and Cornerstone
are referred to herein as "Corporation." A shareholder may not dissent as to
less than all of the shares that he beneficially owns. A nominee or fiduciary
may not dissent on behalf of any beneficial owner as to less than all of the
shares of such beneficial owner held of record by such nominee or fiduciary. A
beneficial owner asserting dissenters' rights to shares held on his behalf must
submit to the Corporation the record shareholder's written consent to the
dissent not later than the time the beneficial shareholder asserts dissenters'
rights. Any shareholder intending to enforce this right must not vote in favor
of the Merger Agreement and must file as written notice of his intent to demand
payment for his shares (the "Objection Notice") with the Corporate Secretary of
the Corporation either before the Annual Meeting or before the vote is taken at
the meeting. The Objection Notice must state that the shareholder intends to
demand payment for his shares of common stock if the Merger is effected. A
vote against approval of the Merger Agreement will not, in and of itself,
constitute an Objection Notice satisfying the requirements of Section 48-23-202
of the TBCA. A failure to vote will not constitute a waiver of appraisal
rights as long as the requirements of Sections 48-23-101 through 48-23-302 of
the TBCA are complied with. HOWEVER, ANY SHAREHOLDER WHO EXECUTES A PROXY CARD
AND WHO DESIRES TO EFFECT HIS APPRAISAL RIGHTS MUST MARK THE PROXY CARD
"AGAINST" THE PROPOSAL RELATING TO THE MERGER BECAUSE IF THE PROXY CARD IS LEFT
BLANK, IT WILL BE VOTED "FOR" THE PROPOSAL RELATING TO THE MERGER.
If the Merger Agreement is approved, each shareholder who has filed an
Objection Notice will be notified by the Corporation of such approval within 10
days of the Annual Meeting (the "Dissenters' Notice"). The Dissenters' Notice
will (i) state where dissenting shareholders must (a) send the Payment Demand
(as defined below) and where and when they must (b) deposit their common stock
certificates (the "Certificates"), (ii) inform holders of uncertificated shares
of the extent of any restrictions on the transferability of such shares, (iii)
be accompanied by a form for demanding payment that includes the date of the
first announcement to the news media or to shareholders of the terms of the
proposed Merger, (iv) set a date by which the Corporation must receive the
Payment Demand, which may not be fewer than 1 or more than 2 months after the
date the Dissenters' Notice is delivered, and (v) be accompanied by a copy of
Sections 48-23-101 through 48-23-302 of the TBCA. Within the time prescribed
in the Dissenters' Notice, a shareholder electing to dissent must make a demand
for payment (the "Payment Demand"), certify whether he acquired beneficial
ownership of the shares before February 16, 1997 (the date of the first public
announcement of the principal terms of the Merger Agreement), and deposit his
Certificates in accordance with the terms of the Dissenters' Notice. Upon
filing the Payment Demand and depositing the Certificates, the shareholder will
retain all other rights of a shareholder until these rights are canceled or
modified by consummation of the Merger. A Payment Demand may not be withdrawn
unless the Corporation consents. FAILURE TO COMPLY WITH THESE PROCEDURES WILL
CAUSE THE SHAREHOLDER TO LOSE HIS DISSENTERS' RIGHTS TO PAYMENT FOR THE SHARES.
CONSEQUENTLY, ANY SHAREHOLDER WHO DESIRES TO EXERCISE HIS RIGHTS TO PAYMENT FOR
HIS SHARES IS URGED TO CONSULT HIS LEGAL ADVISER BEFORE ATTEMPTING TO EXERCISE
SUCH RIGHTS.
As soon as the Merger is consummated, or upon receipt of a Payment
Demand, the Corporation shall, pursuant to Section 48-23-206, pay to each
dissenting shareholder who has complied with the requirements of Section
48-23-294 of the TBCA the amount that the Corporation estimates to be the fair
value of the shares of common stock, plus accrued interest. Section 48-23-206
of the TBCA requires the payment to be accompanied by (i) certain of the
Corporation's financial statements, (ii) a statement of the Corporation's
estimate of fair value of the shares and explanation of how the interest was
calculated, (iii) notification of rights to demand payment, and (iv) a copy of
Sections 48-23-101 through 48-23-302 of the TBCA. As authorized by Section
48-23-208, East Ridge and Cornerstone intend to delay any payments with respect
to any shares (the "after-acquired shares") held by a dissenting shareholder
which were not held by such shareholder on February 16, 1997, the date of the
first public announcement of the terms of the Merger Agreement. When payments
are so withheld, Sections 48-23-208(b) and 48-23-209(a) will
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<PAGE> 42
require East Ridge and Cornerstone, as applicable, after the Merger, to send
to the holder of the after-acquired shares an offer to pay the holder an amount
equal to East Ridge's or Cornerstone's estimate of their fair value plus
accrued interest, together with an explanation of the calculation of interest
and a statement of the holder's right to demand payment under Section
48-23-209.
If the Merger is not consummated within two months after the date set for
demanding payment and depositing Certificates, the Corporation shall return the
deposited Certificates and release the transfer restrictions imposed on
uncertificated shares. If, after returning deposited Certificates and
releasing transfer restrictions, the Merger is consummated, the Corporation
must send a new Dissenters' Notice and repeat the payment demand procedure.
If the dissenting shareholder believes that the amount paid by the
Corporation pursuant to Section 48-23-206 or offered under Section 48-23-208 is
less than the fair value of his shares or that the interest due is calculated
incorrectly, or if the Corporation fails to make payment (or, if the Merger has
not consummated, the Corporation does not return the deposited Certificates or
release the transfer restrictions imposed on uncertificated shares) within two
months after the date set in the Dissenters' Notice, then the dissenting
shareholder may, within one month after (i) the Corporation made or offered
payment for the shares or failed to pay for the shares or (ii) the Corporation
failed to return deposited Certificates or release restrictions on
uncertificated shares timely, notify the Corporation in writing of his own
estimate of the fair value of such shares (including interest due) and demand
payment of such estimate (less any payment previously received). FAILURE TO
NOTIFY THE CORPORATION IN WRITING OF A DEMAND FOR PAYMENT WITHIN ONE MONTH
AFTER THE CORPORATION MADE OR OFFERED PAYMENT FOR SUCH SHARES WILL CONSTITUTE A
WAIVER OF THE RIGHT TO DEMAND PAYMENT.
If the Corporation and the dissenting shareholder cannot agree on a fair
price two months after the Corporation receives such a demand for payment, the
statute provides that the Corporation will institute judicial proceedings in a
court of record with equity jurisdiction in Hamilton County, Tennessee, (the
"Court") to fix (i) the fair value of the shares immediately before
consummation of the Merger, excluding any appreciation or depreciation in
anticipation of the Merger, and (ii) the accrued interest. The "fair value" of
the common stock could be more than, the same as, or less than that produced by
the exchange ratios. The Corporation must make all dissenters whose demands
remain unsettled parties to the proceeding and all such parties must be served
with a copy of the petition. The Court may, in its discretion, appoint an
appraiser to receive evidence and recommend a decision on the question of fair
value. The Court is required to issue a judgment for the amount, if any, by
which the fair value of the shares, as determined by the Court, plus interest,
exceeds the amount paid by the Corporation or for the fair value, plus accrued
interest, of his after-acquired shares for which the Corporation elected to
withhold payment. If the Corporation does not institute such proceeding within
such two month period, the Corporation shall pay each dissenting shareholder
whose demand remains unsettled the respective amount demanded by each
shareholder.
The Court will assess the costs and expenses of such proceeding
(including reasonable compensation for and the expenses of the appraiser by
excluding fees and expenses of counsel and experts) against the Corporation,
except that the Court may assess such costs and expenses as it deems
appropriate against any or all of the dissenting shareholders if it finds that
their demand for additional payment was arbitrary, vexatious or otherwise not
in good faith. The Court may assess fees and expenses of counsel and experts
in amounts the Court finds equitable: (i) against the Corporation if the Court
finds that the Corporation did not substantially comply with the relevant
requirements of the TBCA or (ii) against either the Corporation or any
dissenting shareholder, if the Court finds that the part against whom the fees
and expenses are assessed acted arbitrarily, vexatiously or not in good faith.
If the Court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters and that the fees of such counsel
should be assessed against the Corporation, the Court may award reasonable fees
to such counsel to be paid out of amounts awarded to benefitted dissenters.
THE FOREGOING SUMMARY OF THE APPLICABLE PROVISIONS OF THE TBCA IS NOT
INTENDED TO BE A COMPLETE STATEMENT OF SUCH PROVISIONS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH SECTIONS, WHICH ARE INCLUDED AS APPENDIX C
HEREOF.
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<PAGE> 43
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The federal income tax discussion set forth below represents a summary
of the opinion of Baker, Donelson, Bearman & Caldwell, a Professional
Corporation, counsel to Cornerstone. It may not be applicable to a shareholder
who acquired his shares of East Ridge Common Stock or Cornerstone Common Stock
pursuant to the exercise of employee stock options or rights or otherwise as
compensation. East Ridge and Cornerstone shareholders are urged to consult
their own tax advisers as to the specific tax consequences to them of the
Merger, including the applicability and effect of federal, state, local and
other tax laws.
General. It is the opinion of counsel that for federal income tax
purposes the Merger will be treated as a reorganization within the meaning of
Section 368(a) of the Code, and that, accordingly, (a) no gain or loss will be
recognized by those Cornerstone shareholders who receive New Cornerstone Common
Stock in exchange for Cornerstone Common Stock in connection with the Merger;
and (b) the tax basis of the New Cornerstone Common Stock to be received by
those Cornerstone shareholders who receive New Cornerstone Common Stock in
connection with the Merger will be the same as the basis in the Cornerstone
Common Stock surrendered in exchange therefor. However, as more fully
discussed below in "Consequences of Warrant Exchange," the exchange of
Cornerstone warrants for New Cornerstone Warrants may not be tax free. In
addition, it is the opinion of counsel that the exchange of East Ridge Common
Stock for New Cornerstone Common Stock pursuant to the Merger will be treated
as a recapitalization within the meaning of Section 368(a)(1)(E) of the Code
or as an exchange described in Section 1036(a) of the Code, and that,
accordingly, (a) no gain or loss will be recognized by those East Ridge
shareholders who receive only New Cornerstone Common Stock in exchange for East
Ridge Common Stock, and (b) the tax basis of the New Cornerstone Common Stock
to be received by those East Ridge shareholders who receive only New
Cornerstone Common Stock in connection with the Merger will be the same as the
basis in the East Ridge Common Stock surrendered in exchange therefor.
Consequently, the holding period of any New Cornerstone Common Stock received
by the Cornerstone shareholders or the East Ridge shareholders in connection
with the Merger will include the holding period of the Cornerstone Common Stock
or East Ridge Common Stock, respectively, surrendered in exchange therefor,
provided that the Cornerstone Common Stock or East Ridge Common Stock is held
as a capital asset at the time of the Merger. Consummation of the Merger is
dependent upon, among other conditions, receipt by East Ridge and the East
Ridge Board, for the benefit of the East Ridge shareholders, of an opinion of
counsel, substantially to this effect.
Consequences of Receipt of Cash.
Under the Merger Agreement, each East Ridge shareholder may elect to
take all or a portion of the amount payable to him or her in cash rather than
New Cornerstone Common Stock. East Ridge shareholders electing to receive only
New Cornerstone Common Stock will receive only New Cornerstone Common Stock.
East Ridge shareholders electing to receive only cash may, in certain
circumstances, receive both cash and New Cornerstone Common Stock. The terms
and conditions of the cash election are more fully described in "The Merger --
Terms of the Merger." If an East Ridge shareholder receives both cash and New
Cornerstone Common Stock in exchange for his East Ridge Common Stock, then gain
(but not loss) will be recognized by the shareholder, but not in an amount in
excess of the amount of cash received. The general rule is that any such gain
will be treated as capital gain, but if the exchange has the effect of the
distribution of a dividend, then the amount of gain recognized that is not in
excess of that shareholder's ratable share of the undistributed earnings and
profits of East Ridge will be treated as a dividend, taxable as ordinary
income, rather than capital gain. The determination of whether the exchange
has the effect of the distribution of a dividend will be made on a
shareholder-by-shareholder basis in accordance with the principles enunciated
in Commissioner v. Clark, 109 S.Ct. 1455 (1989). Any such gain will generally
be treated as a long-term capital gain provided that (i) the East Ridge Common
Stock was held by the shareholder as a capital asset on the date of the Merger,
(ii) the holding period for the shares of such East Ridge Common Stock was more
than one year, and (iii) if the shareholder had received New Cornerstone Common
Stock instead of cash and if the New Cornerstone Common Stock had been redeemed
immediately after the Merger, the redemption would have qualified as being
"substantially disproportionate" under Section 302(b)(2) of the Code.
The substantially disproportionate test will be met by a shareholder
if, after the transaction, the shareholder will own less than fifty percent
(50%) of all New Cornerstone Common Stock and if his or her percentage
ownership of New Cornerstone Common Stock after the transaction will be less
than eighty percent (80%) of what his or her percentage ownership of East Ridge
Common Stock would have been if no East Ridge or Cornerstone shareholders
received cash and if no East Ridge or Cornerstone shareholders dissented. In
applying the above test to determine whether a redemption is substantially
disproportionate, each shareholder will be considered to own not only the stock
which he or she actually owns, but
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<PAGE> 44
such shareholder also will be considered to constructively own stock from
certain related parties under Section 318 of the Code. The related parties
whose stock ownership will be attributed to an individual shareholder include
the shareholder's spouse, children, grandchildren and parents and also include
partnerships, estates, trusts and corporations in which the shareholder has an
interest. If the shareholder is an entity rather than a natural person, stock
owned by the persons holding an interest in the entity may be attributed to the
entity. In either case, stock which is subject to an option may be attributed
to the option holder. The constructive ownership rules may be applied more
than once so that stock which is attributed to one person or entity may, in
turn, be attributed to yet another person or entity. Because both the
substantially disproportionate test and the constructive stock ownership rules
are very complex and the effect of these provisions will vary substantially
based on each shareholder's individual circumstances, each East Ridge
shareholder electing to receive cash in whole or in part is urged to consult
his or her personal tax advisor as to whether or not any cash received may be
treated as a dividend.
In the case of any East Ridge shareholder who receives both New
Cornerstone Common Stock and cash, the shareholder's tax basis for the New
Cornerstone Common Stock received will be the same as the basis of all the
shares of East Ridge Common Stock owned by the shareholder, decreased by the
amount of cash received by the shareholder, increased by any amount that is
treated as a dividend and further increased by any amount of capital gain
which is recognized by the shareholder because of the Merger.
If an East Ridge shareholder or a Cornerstone shareholder receives
solely cash in exchange for his or her present Common Stock, either because of
an election to receive all cash or because of the exercise of any right to
dissent to the transaction, such cash will be treated as having been received
as a distribution in redemption of New Cornerstone Common Stock, subject to the
provisions of Section 302 of the Code. If, as a result of the distribution,
the shareholder owns no New Cornerstone Common Stock, either directly or by
reason of the constructive stock ownership rules under Section 318 of the Code,
the redemption will be a complete termination of interest within the meaning of
Section 302(b), and the cash will be treated as a distribution in full payment
in exchange for the shareholder's Common Stock. Such shareholders will
recognize gain or loss measured by the difference between the amount of cash
received and the adjusted basis of the Common Stock surrendered. As previously
discussed, the application of the constructive stock ownership rules are very
complex, and the effect of these rules will vary substantially based on each
shareholder's individual circumstances; therefore, each shareholder who will
receive solely cash in exchange for his or her shares of East Ridge Common
Stock or Cornerstone Common Stock is urged to consult his or her personal tax
advisor.
Consequences of Receipt of Cash in Lieu of Fractional Shares.
An East Ridge shareholder who is entitled to receive cash in lieu of a
fractional share interest of New Cornerstone Common Stock in connection with
the Merger will recognize, as of the date of the Merger, gain (or loss) equal to
the difference between such cash amount and the shareholder's basis in the
fractional share interest. Any gain (or loss) recognized will be capital gain
(or loss) if the East Ridge Common Stock is held by such shareholder as a
capital asset at the date of the Merger.
Consequences of Warrant Exchange
Under Section 1.3541(e) of the Income Tax Regulations presently in
effect, stock warrants are not considered to be either stock or securities
which may be exchanged tax-free in a reorganization. Accordingly, the Internal
Revenue Service has ruled in the past that an exchange of warrants of the
acquired corporation for warrants of the acquiring corporation should be
treated as a separable transaction from the reorganization and that gain or
loss on the exchange of warrants should be recognized.
On December 23, 1996, the Internal Revenue Service proposed an
amendment to the Income Tax Regulations to treat warrants as securities which
could be exchanged tax-free in a reorganization. However, there is no assurance
that these regulations will be adopted in their present proposed form. In
addition, the proposed effective date for the regulations is 60 days after the
adoption of the final regulations. There is no assurance that the regulations
will be adopted in time to apply to the exchange of Cornerstone warrants for
New Cornerstone Warrants.
Accordingly, in view of the proposed but not yet effective amendments
to the Income Tax Regulations, counsel has expressed no opinion as to whether
any gain or loss will be recognized for federal income tax purposes on the
exchange of warrants for New Cornerstone Warrants. In the event that the
exchange of warrants is a taxable transaction, Cornerstone cannot make any
representation with respect to the value of the warrants or the gain or loss
realized on the exchange. Each Cornerstone warrant holder is urged to consult
his or her personal tax advisor.
ACCOUNTING TREATMENT
The transaction will be treated as a purchase for accounting purposes and
is a "reverse acquisition" where the acquirer is deemed to be Cornerstone in
view of the 79.4% ownership interest of the Cornerstone shareholders in New
Cornerstone after the Merger.
EXPENSES
The Merger Agreement provides, in general, that East Ridge and
Cornerstone will each pay its own expenses in connection with the Merger
Agreement and the transactions contemplated thereby, except that East Ridge and
Cornerstone will divide equally the costs of printing this Joint Proxy
Statement/Prospectus and any other documents required in connection with the
Merger.
PROPOSAL 2. ELECTION OF DIRECTORS
EAST RIDGE
A board of six directors will be elected at the East Ridge Meeting by the
holders of East Ridge Common Stock, to hold office until their successors have
been elected and qualified. It is intended that, unless authorization to do so
is withheld, the proxies will be voted "FOR" the election of the director
nominees named below, each of whom is currently a director of East Ridge. The
East Ridge Board believes that, if elected, each nominee will be willing to
serve. The following persons have been nominated:
James L. Eidson, Sr. James D. Renegar
Jason D. Helton, Jr. Paul M. Starnes
William B. Luther David E. Young
CORNERSTONE
A board of 15 directors will be elected at the Cornerstone Meeting by the
holders of Cornerstone Common Stock, to hold office until their successors have
been elected and qualified. It is intended that, unless authorization to do so
is withheld, the proxies will be voted "FOR" the election of the director
nominees named below, each of whom is currently a director of Cornerstone. The
Cornerstone Board believes that, if elected, each nominee will be willing to
serve. The following persons have been nominated:
Ramesh V. Amin Russell W. Lloyd
Randy Brooks Earl A. Marler, Jr.
B. Kenneth Driver Doyce G. Payne, M.D.
Karl Fillauer Bill Pollard
Timothy L. Hobbs Turner Smith
Carolyn C. Johnson Billy O. Wiggins
James H. Large Marsha Yessick
Lawrence D. Levine
PROPOSAL 3. AMENDMENT OF THE CHARTER OF CORNERSTONE
At the Cornerstone Meeting, shareholders will be asked to amend the
Charter of Cornerstone to authorize the exercise of trust powers. While it is
not anticipated that Cornerstone will immediately begin the operations of a
trust department, the Cornerstone Board believes that having the ability to
exercise trust powers is important for the implementation of Cornerstone's
focus on serving the banking needs of its customers. The amendment to the
Charter is subject to the approval of the TDFI and the FDIC. The Cornerstone
Board recommends a vote "FOR" the amendment to the Charter.
PROPOSAL 4. RATIFICATION OF THE APPOINTMENT OF AUDITORS OF CORNERSTONE
At the Cornerstone Meeting, shareholders will be asked to ratify the
appointment of Hazlett, Lewis & Bieter, PLLC, as Cornerstone's independent
certified public accountants. Hazlett, Lewis & Bieter, PLLC, has served as the
independent accountants for Cornerstone since its inception on January 23,
1996. The Cornerstone Board recommends a vote "FOR" the ratification of the
appointment of auditors as described herein.
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<PAGE> 45
INFORMATION CONCERNING EAST RIDGE
SELECTED FINANCIAL DATA FOR EAST RIDGE
The following table presents for East Ridge, on a historical basis,
selected financial data and ratios. This information is based on the
consolidated financial statements of East Ridge included herein and should be
read in conjunction therewith and with the notes thereto. See "Summary --
Equivalent and Pro Forma Share Data" and "-- Selected Financial Data and
Ratios," and "Index to Financial Statements of East Ridge Bancshares, Inc. and
Subsidiary."
<TABLE>
<CAPTION> Three Months
ended March 31, Years ended December 31,
--------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands except per
share data)
SUMMARY INCOME STATEMENTS:
Interest income ................... $ 863 $ 798 $ 3,328 $ 3,041 $ 2,480 $ 2,160 $ 2,175
Less interest expense ............. 400 395 1,541 1,402 936 859 999
------- ------- ------- ------- ------- ------- -------
Net interest income ............... 463 403 1,787 1,639 1,544 1,301 1,176
Provision for loan losses ......... 12 12 36 48 74 75 60
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses ................... 451 391 1,751 1,591 1,470 1,226 1,116
Noninterest income ................ 101 143 458 442 499 486 178
------- ------- ------- ------- ------- -------- --------
Adjusted gross income after
provision for loan losses ......... 552 534 2,209 2,033 1,969 1,712 1,294
Noninterest expense ............... 397 377 1,521 1,541 1,617 1,551 1,102
------- ------- ------- ------- ------- -------- --------
Income before income taxes ........ 155 157 688 492 352 161 192
Applicable income taxes ........... 44 48 202 149 133 5 53
------- ------- ------- ------- ------- -------- --------
Net income ........................ $ 111 $ 109 $ 486 $ 343 $ 219 $ 156 $ 139
======= ======= ======= ======= ======= ======== ========
COMMON STOCK DATA:
Net income per common share ....... $ 1.02 $ 0.97 $ 4.34 $ 3.06 $ 1.96 $ 1.49 $ 1.39
Cash dividends declared per common
share .......................... -- -- -- -- -- -- --
SELECTED AVERAGE BALANCES:
Total assets ...................... $43,014 $39,377 $42,025 $37,747 $33,597 $29,409 $27,088
Total loans ....................... $24,731 $22,261 $24,237 $21,947 $20,715 $17,857 $15,699
Investment securities ............. $12,032 $11,543 $12,338 $10,153 $ 7,897 $ 5,878 $ 6,037
Earning assets .................... $38,739 $35,372 $37,914 $33,699 $29,374 $25,216 $24,914
Deposits .......................... $39,092 $36,145 $38,396 $34,626 $30,201 $26,953 $25,019
Shareholders' equity .............. $ 2,908 $ 2,481 $ 2,849 $ 2,440 $ 2,144 $ 1,878 $ 1,629
Shares outstanding (thousands) .... 109 112 112 112 112 112 112
SELECTED PERIOD-END BALANCES:
Total assets ...................... $44,533 $42,410 $44,366 $40,399 $33,614 $32,307 $27,493
Total loans ....................... $25,016 $23,180 $25,274 $22,714 $21,809 $19,280 $16,292
Investment securities ............. $12,790 $13,071 $10,774 $13,119 $ 7,545 $ 6,986 $ 6,543
Earning assets .................... $40,406 $37,976 $40,363 $36,408 $29,954 $28,146 $24,535
Deposits .......................... $40,684 $38,947 $40,562 $37,117 $30,676 $29,690 $25,253
Shareholders' equity .............. $ 3,083 $ 2,733 $ 3,047 $ 2,650 $ 2,229 $ 2,058 $ 1,698
Shares outstanding (thousands) .... 109 112 110 112 112 112 112
SELECTED RATIOS:
Return on average equity(1)........ 15.27% 17.57% 17.06% 14.06% 10.21% 8.31% 8.53%
Return on average assets(1)........ 1.03% 1.11% 1.16% 0.91% 0.65% 0.53% 0.51%
Net interest margin (not a fully
taxable equivalent)(1)............. 4.33% 4.17% 4.29% 4.53% 4.99% 5.07% 4.45%
Allowance for loan losses to loans. 1.24% 1.35% 1.17% 1.35% 1.31% 1.00% 1.01%
Net charge-offs to average loans(1) -0.05% 0.13% 0.19% 0.12% 0.09% 0.26% 0.18%
Average equity to average assets .. 6.76% 6.30% 6.78% 6.46% 6.38% 6.39% 6.01%
</TABLE>
- -----------
(1) Information for three months ended March 31, 1997 and 1996 has been
annualized.
- 32 -
<PAGE> 46
EAST RIDGE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
East Ridge's Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
information and tables which follow. For a discussion of liquidity and the
impact of inflation, see "Capital Resources/Liquidity" below.
SUMMARY
Net income for 1996 was $486,000, a 42% increase from East Ridge's net
income of $343,000 in 1995. Net income for 1995 was $124,000 or 57% higher
than the 1994 net income of $219,000. Net income per common share for 1996 was
42% higher than in 1995 and in 1995 was 56% higher compared to 1994. Pretax
income for 1996 increased $196,000 or 40% from 1995 and $141,000 or 40% from
1994 to 1995. The larger increase in the 1995 net income over the 1995 pretax
income is attributable to a $67,000 increase in tax exempt interest income.
The increase in net income from 1995 to 1996 is primarily due to an
increase in interest-earning assets of $4.215 million and only a 0.05% (tax
adjusted) decrease in the net interest margin. The increase in net income from
1994 to 1995 was attributable to an increase in interest-earning assets of
$4.325 million offset somewhat by a decrease in the net interest margin by
0.29% (tax adjusted). The 1995 increase was also due in part to a $26,000
decrease in the loan loss provision and decreases of $31,000 in the FDIC
assessment and $35,000 in computer rental expense offset by a decrease in
income from SBA loan sales of $59,000.
The first three months of 1997 reflect net income of $111,000, 1.8%
more than the $109,000 earned for the first three months of 1996. As of March
31, 1997, average federal funds sold increased by 289% as compared to March 31,
1996. This led to the $38,000 increase in other interest income for 1997. In
addition, noninterest income decreased by 29.4% as no SBA loans were sold during
the first three months of 1997, while income generated by SBA loan sales were
$45,000 during the first three months of 1996. No other material changes
occurred in the results of operations or balance sheet during the first quarter
of 1997.
For the remainder of the year in 1997, East Ridge will continue its
objectives of maintaining asset quality and providing superior customer service
to its markets. New services have not been implemented during 1997 due to the
anticipated Merger.
FINANCIAL CONDITION
Earning Assets. Average earning assets in 1996 increased $4.2 million
or 12.5% over 1995 primarily due to an increase in average loans outstanding
and an increase in the average investment securities portfolio. The loan growth
was primarily funded by a significant increase in time deposits. Average
earning assets in 1995 increased by $4.3 million or 14.7% over 1994 due
primarily to an increase in average investment securities.
Loan Portfolio. East Ridge's average loans for 1996 were $24.2
million, an increase of 10.4% over $21.9 million in average loans for 1995.
Loan growth for 1996 was primarily funded through increased deposit growth and
prepayments from mortgage-backed securities and maturities in the investment
portfolio. Real estate loans increased by $1.8 million or 12.3% over 1995.
Average loans for 1995 increased by $1.2 million over 1994, an increase of
5.9%. The increase in ending balance from 1995 to 1996 and 1994 to 1995 was
consistent with the increase in average balances.
Investment Portfolio. East Ridge's investment securities portfolio
decreased by 17.9% or $2.3 million from 1995 to 1996. The balance in the
securities portfolio decreased in order to fund loan growth. The 1995
investment securities portfolio increased by $5.6 million over 1994, an
increase of 74.7% The increase in deposits helped to fund the investment
securities portfolio growth. East Ridge maintains an investment strategy of
seeking portfolio yields within acceptable risk levels, as well as providing
liquidity. East Ridge maintains two classifications of investment securities:
"Held to Maturity" and "Available for Sale." The "Available for Sale"
securities are carried at fair market value, whereas the "Held to Maturity"
securities are carried at book value. At year end 1996, unrealized gains in the
"Available for Sale" portfolio amounted to $15,000. At the end of 1995 the
unrealized gains in the "Available for Sale" portfolio amounted to $47,000.
Deposits. East Ridge's average deposits increased $3.8 million or
10.9% from 1995 to 1996. Average deposits increased $4.4 million or 14.7% from
1994 to 1995. From year end 1995 to year end 1996, total deposits increased
$3.4 million or 9.3%. The largest portion of growth during 1996 was in time
deposits that increased $2.6 million or 14.2%. This is due to East Ridge's
strategy of increasing time deposits by offering competitive prices to
- 33 -
<PAGE> 47
customers. From 1995 to 1996 interest-bearing transaction deposits increased
$280,000 or 3.4%, savings deposits decreased $64,000 or 1.0% and other time
deposits of less than $100,000 increased $2.4 million or 16.9%. From 1994 to
1995 interest-bearing transaction deposits increased $426,000 or 5.4%, savings
deposits decreased $1.329 million or 20.1%, other time deposits of less than
$100,000 increased $4.578 million or 47.1%, and time deposits of $100,000 or
more increased by $1.887 million or 109.1%. The largest portion of deposit
growth was in time deposits. This was also due to East Ridge's strategy of
offering better rates to increase time deposits.
Capital Resources. Stockholders' equity increased $397,000 or 15.0%
to $3.0 million as of December 31, 1996, compared with $2.6 million at the end
of 1995, and $2.2 million at year end 1994. East Ridge purchased and retired
1,980 shares of common stock in 1996. Retention of earnings accounted for all
the increase in stockholders' equity during 1996.
A decrease in unrealized appreciation of "Available for Sale"
investment securities accounted for a decrease of $19,825 in stockholders'
equity as of December 31, 1996. The changes in values in the unrealized
appreciation are not taken into account in determining regulatory capital
requirements. Excluding the securities "Available for Sale" adjustment,
stockholders' equity was $3.0 million as of year end 1996, compared to $2.6
million for 1995, an increase of $417,000 or 15.9%.
No new common stock was issued by East Ridge during 1996.
BALANCE SHEET MANAGEMENT
Liquidity Management. Liquidity is the ability of a company to convert
assets into cash without significant loss and to raise funds by increasing
liabilities. Liquidity management involves having the ability to meet the
day-to- day cash flow requirements of its customers, whether they are
depositors wishing to withdraw funds or borrowers requiring funds to meet their
credit needs.
The primary function of asset/liability management is not only to
assure adequate liquidity in order for East Ridge to meet the needs of its
customer base, but to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities so that East Ridge
can profitably deploy its assets. Both assets and liabilities are considered
sources of liquidity funding and both are, therefore, monitored on a daily
basis.
The asset portion of the balance sheet provides liquidity primarily
through loan repayments and maturities of investment securities. Additional
sources of liquidity are the investments in federal funds sold and prepayments
from the mortgage-backed securities from the investment portfolio.
The liability portion of the balance sheet provides liquidity through
various interest bearing and noninterest bearing deposit accounts. At year end
East Ridge had $1.0 million of federal funds available and a line of credit
from a commercial bank of which approximately $600,000 was available and
unused.
RESULTS OF OPERATIONS
Net Interest Income. Net interest income is the principal component
of a financial institution's income stream and represents the spread between
interest and fee income generated from earning assets and the interest expense
paid on deposits. The following discussion is on a fully taxable equivalent
basis.
Net interest income for 1996 increased $192,000 or 11.5% over 1995,
$129,000 or 8.3% in 1995 over 1994 and $235,000 or 17.9% in 1994 over 1993.
The increase in the net interest income from 1995 to 1996 is primarily due to
the increase in the interest-earning assets with a slight decrease in the net
interest margin. The increase in the net interest income from 1994 to 1995 was
attributable to an increase in interest-earning assets offset by a 0.29%
decrease in the net interest margin. See "Net Interest Income" for the detail
of changes in interest income, interest expense
- 34 -
<PAGE> 48
and net interest margin due to changes in volumes and rates, in addition to the
changes in interest-earning assets and interest-bearing liabilities.
Interest income increased $331,000 or 10.8% in 1996 from 1995, and
increased $595,000 or 24.0% in 1995 from 1994. Interest income produced by the
loan portfolio increased $168,000 or 7.1% in 1996 from 1995, and increased
$328,000 or 16.1% in 1995 from 1994. Interest income on investment securities
increased $201,000 or 32.9% from 1995 to 1996, and increased $192,000 or 45.8%
from 1994 to 1995. The increase in investment income from 1994 to 1996 is due
to the increase in the average investment securities portfolio during the two
years. Interest income-other increased by $38,000 for the three months ended
March 31, 1997 over March 31, 1996. This was due to the average federal funds
sold increase of 289% as of March 31, 1997 as compared to March 31, 1996.
Income from federal funds sold decreased $38,000 or 36.2% from 1995 to
1996 and increased $75,000 or 250% from 1994 to 1995. The average federal
funds sold decreased from 1995 to 1996 which generated less in interest income.
For 1994 to 1995 average federal funds increased; therefore, the interest
income increased over the previous year.
Total interest expense increased by $139,000 or 9.9% in 1996 from
1995, and increased $466,000 or 49.8% in 1995 from 1994. The interest expense
increase from 1994 to 1996 is primarily due to the increase in average time
deposits.
The trend in net interest income is commonly evaluated in terms of
average rates using the net interest margin and the interest rate spread. The
net interest margin, or the net yield on earning assets is computed by dividing
fully taxable equivalent net interest income by average earning assets. This
ratio represents the difference between the average yield on average earning
assets and the average rate paid for all funds used to support those earning
assets. The net interest margin decreased 5 basis points in 1996 to 4.92%.
The net cost of funds, defined as interest expense divided by average-earning
assets, decreased 1 basis point from 4.50% in 1995 to 4.49% in 1996. The
yield on earning assets decreased 14 basis points to 8.99% in 1996 from 9.13%
in 1995.
The interest rate spread measures the difference between the average
yield on earning assets and the average rate paid on interest bearing sources
of funds. The interest rate spread eliminates the impact of noninterest
bearing funds and gives a direct perspective on the effect of market interest
rate movements. During recent years, the net interest margins and interests
rate spreads have been under intense pressure to maintain historical levels,
due in part to tax laws that discouraged investment in tax-exempt securities
and intense competition for funds with non-bank institutions. As a result of
changes in the asset and liability mix during 1996, the interest rate spread
decreased 13 basis points from 1995 to 1996. The change in the asset and
liability mix during 1995 resulted in an interest rate spread decrease of 37
basis points.
Allowance for Loan Losses. Lending officers are responsible for the
ongoing review and administration of each loan. They make the initial
identification of loans which present some difficulty in collection or where
there is an indication that the probability of loss exists. Lending officers
are responsible for the collection effort on a delinquent loan. Senior
management is informed of the status of delinquent and problem loans on a
monthly basis.
Senior management makes recommendations monthly to the board of
directors as to charge-offs. Senior management reviews the allowance for
possible loan losses on a quarterly basis. East Ridge's policy is to
discontinue interest accrual when payment of principal and interest is 90 days
or more in arrears.
The allowance for possible loan losses represents management's
assessment of the risks associated with extending credit and its evaluation of
the quality of the loan portfolio. Management analyzes the loan portfolio to
determine the adequacy of the allowance for possible loan losses and the
appropriate provisions required to maintain a level considered adequate to
absorb anticipated loan losses. In assessing the adequacy of the allowance,
management reviews the size, quality and risk of loans in the portfolio.
Management also considers such factors as loan loss experience, the amount of
past due and nonperforming loans, specific known risk, the status and amount of
nonperforming assets, underlying collateral values securing loans, current and
anticipated economic conditions and other factors which affect the allowance
for potential credit losses.
- 35 -
<PAGE> 49
While it is East Ridge's policy to charge off in the current period
the loans in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. Because these risks include the state of the
economy, management's judgment as to the adequacy of the allowance is
necessarily approximate and imprecise.
Management believes that the $311,000 for March 31, 1997 and $296,000
for December 31, 1996 in the allowance for loan losses was adequate to absorb
known risks in the portfolio. No assurance can be given, however, that
adverse economic circumstances will not result in increased losses in the loan
portfolio, and require greater provisions for possible loan losses in the
future.
Nonperforming Assets. Nonperforming assets include nonperforming
loans and foreclosed real estate held for sale. Nonperforming loans include
loans classified as nonaccrual or renegotiated. East Ridge's policy is to
place a loan on nonaccrual status when it is contractually past due 90 days or
more as to payment of principal or interest. At the time a loan is placed on
nonaccrual status, interest previously accrued but not collected is reversed
and charged against current earnings. Recognition of any interest after a loan
has been placed on nonaccrual is accounted for on a cash basis.
East Ridge had nonperforming assets at March 31, 1997 of $6,000 and
none as of December 31, 1996.
Noninterest Income. Noninterest income consists of revenues generated
from a broad range of financial services and activities including fee-based
services and profits and commissions earned through credit life insurance sales
and other activities. In addition, gains or losses realized from the sale of
investment portfolio securities are included in noninterest income. Total
noninterest income decreased by $42,000 or 29.4% for the three months ended
March 31, 1997 as compared to 1996, since no SBA loans were sold during the
first three months of 1997 while income generated by SBA loan sales was $45,000
during the first three months of 1996. Total noninterest income increased
$16,000 or 3.6% in 1996 compared to 1995. Noninterest income for 1995 showed
decrease of $57,000 or 11.4% from 1994.
Fee income from service charges on deposit accounts decreased $17,000
or 4.9% in 1996 following a $4,000 or 1.1% decrease in 1995. Due to increased
competition, East Ridge lowered its service charge on small business accounts
in 1995 resulting in decreased service charge income in 1995 and 1996.
Nonrecurring items of noninterest income include sales of investment portfolio
securities; however, East Ridge did not realize any gains or losses from the
sales of securities in 1995 or 1996. Included in other noninterest income are
gains on sales of the guaranteed portions of SBA loans. In 1996 East Ridge
realized $45,000 from the sale of SBA loans. There were no gains in 1995.
Noninterest Expenses. Noninterest expense for 1996 decreased $20,000
or 1.2% from 1995, decreased $76,000 or 4.7% in 1995 from 1994 and increased
$66,000 or 4.3% in 1994 from 1993. Salaries and employee benefits in 1996
increased $30,000 or 3.3% from 1995 to a total of $931,000 at year-end 1996.
Salaries and employee benefits in 1995 decreased $14,000 or 1.5% from 1994.
The increase in 1996 was the result of normal pay increases. The decrease in
1995 was due to a reduction in staff.
Occupancy expense decreased by $18,000 or 18.5% in 1996 following an
increase of $2,000 or 2.3% in 1995. Occupancy expense was lower in 1996 due to
a decrease in building repairs and maintenance.
All other noninterest expenses decreased by $31,000 or 5.7% in 1996,
following a $65,000 or 10.7% decrease in 1995. Included in all other
noninterest expense is FDIC insurance that in 1996 decreased $34,000 or 94.2%
from 1995. The other expenses include supplies and printing, telephone,
postage and legal and audit fees. The decrease in other noninterest expenses
was due to a concerted effort by senior management and staff to reduce
overhead.
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating
overhead, and to the extent loans and other assets bear variable rates, the
yields on such assets. Unlike most industrial companies, virtually all of the
assets and
- 36 -
<PAGE> 50
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates. At the beginning of 1996,
the Federal Reserve Board decreased interest rates 75 basis points in an effort
to enhance growth in the economy through monetary policy. The prime rate
remained unchanged through 1996 and increased 25 basis points in the first
quarter of 1997. In addition, inflation affects financial institutions' cost
of goods and services purchased, the cost of salaries and benefits, occupancy
expense and similar items. Inflation and related increases in interest rates
generally decrease the market value of investments and loans held and may
adversely affect liquidity, earnings and stockholders' equity. Mortgage
originations and refinancings tend to slow as interest rates increase and can
reduce East Ridge's earnings from such activities and the income from the sale
of residential mortgage loans in the secondary market.
- 37 -
<PAGE> 51
NET INTEREST INCOME
The following table sets forth weighted yields earned by East Ridge on
its earning assets and the weighted average rates paid on its deposits and
other interest-bearing liabilities for the years indicated and certain other
information:
<TABLE>
<CAPTION>
1996 1995
--------------------------------- ----------------------------------------
Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/
(Fully taxable equivalent) (Dollars in thousands) Balance Expense Rates Balance Expense Rates
--------- -------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans ............................................ $ 24,237 $2,529 10.43% $ 21,947 $ 2,361 10.76%
U.S. Treasury and other U.S. government
agencies....................................... 9,490 577 6.08% 8,814 503 5.71%
States and municipalities ........................ 2,848 235 8.25% 1,339 108 8.07%
Federal funds sold ............................... 1,339 67 5.00% 1,599 105 6.57%
-------- ------ ---------- ---------- ------
Total interest-earning assets/interest income.. $ 37,914 $3,408 8.99% $ 33,699 $ 3,077 9.13%
Cash and due from banks .......................... 2,422 2,324
Other assets ..................................... 2,002 2,036
Allowance for loan losses ........................ (313) (312)
-------- ----------
Total assets .................................. $ 42,025 $ 37,747
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits .................................. $ 8,773 $ 204 2.33% $ 8,214 $ 197 2.40%
Savings .......................................... 6,500 228 3.51% 6,862 247 3.60%
Time certificates ................................ 18,684 1,077 5.76% 15,748 926 5.88%
Other borrowings ................................. 397 32 8.06% 355 32 9.01%
-------- ------ ---------- ----------
Total interest-bearing liabilities/interest
expense ................................. $ 34,354 $1,541 4.49% $ 31,179 $ 1,402 4.50%
------ ----------
Non-interest-bearing demand deposits.............. 4,439 3,802
Other liabilities ................................ 383 326
Shareholders' equity ............................. 2,849 2,440
-------- ----------
Total liabilities and shareholders' equity..... $ 42,025 $ 37,747
======== ==========
Net interest earnings ............................ $1,867 $ 1,675
====== ==========
Net interest on interest-earning
assets ........................................... 4.92% 4.97%
===== ====
Taxable equivalent adjustment:
Investment securities ......................... $ 80 $ 36
</TABLE>
<TABLE>
<CAPTION>
Average Volume Change in Volume Average Rate
-------------------------- ------------------ --------------------------
1996 1995 1994 1996-95 1995-94 1996 1995 1994
---- ---- ---- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ................................. $24,237 $21,947 $20,715 $ 2,290 $ 1,232 10.43% 10.76% 9.81%
U.S. Treasury and other U.S.
government agencies ................... 9,490 8,814 7,792 676 1,022 6.08% 5.71% 5.29%
States and municipalities ............. 2,848 1,339 105 1,509 1,234 8.25% 8.07% 6.67%
Federal funds sold .................... 1,339 1,599 762 (260) 837 5.00% 6.57% 3.94%
------- ------- ------- ------- -------
Total interest-earning assets ....... $37,914 $33,699 $29,374 $ 4,215 $ 4,325
======= ======= ======= ======= =======
Interest-bearing liabilities:
Demand deposits ....................... $ 8,773 $ 8,214 $ 7,821 $ 559 $ 393 2.33% 2.40% 2.07%
Savings ............................... 6,500 6,862 7,863 (362) (1,001) 3.51% 3.60% 3.59%
Time certificates ..................... 18,684 15,748 11,084 2,936 4,664 5.76% 5.88% 4.23%
Other borrowings ...................... 397 355 330 42 25 8.06% 9.01% 6.97%
------- ------- ------- ------- -------
Total interest-bearing liabilities .. $34,354 $31,179 $27,098 $ 3,175 $ 4,081
======= ======= ======= ======= =======
Net interest on interest-earning assets 4.92% 4.97% 5.26%
</TABLE>
- 38-
<PAGE> 52
<TABLE>
<CAPTION>
Income/Expense Variance 1996 1995
------------------------ ---------------- -------------------- ----------------------
1996 1995 1994 1996-95 1995-94 Volume Rate Mix Volume Rate Mix
------ ------ ------ ------- ------- ----- ---- --- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ......................... $2,529 $2,361 $2,033 $ 168 $ 328 $ 239 $(80) $ 9 $ 133 $208 $(13)
U.S. Treasury and other U.S.
government agencies ......... 577 503 412 74 91 41 35 (2) 58 37 (4)
States and municipalities ..... 235 108 7 127 101 124 5 (2) 100 19 (18)
Federal funds sold ............ 67 105 30 (38) 75 (13) (21) (4) 55 42 (22)
------ ------ ------ ----- ----- ----- ---- --- ----- ---- ----
Total interest-earning assets $3,408 $3,077 $2,482 $ 331 $ 595 $ 391 $(61) $ 1 $ 346 $306 $(57)
====== ====== ====== ===== ===== ===== ==== === ===== ==== ====
Interest-bearing liabilities:
Demand deposits ............... $ 204 $ 197 $ 162 $ 7 $ 35 $ 13 $ (6) $-- $ 9 $ 27 $ (1)
Savings ....................... 228 247 282 (19) (35) (13) (6) -- (36) 1 --
Time certificates ............. 1,077 926 469 151 457 169 (22) 4 274 260 (77)
Other borrowings .............. 32 32 23 -- 9 3 (4) 1 2 7 --
------ ------ ------ ----- ----- ----- ---- --- ----- ---- ----
Total interest-bearing
liabilities ............... $1,541 $1,402 $ 936 $ 139 $ 466 $ 172 $(38) $ 5 $ 249 $295 $(78)
====== ====== ====== ===== ===== ===== ==== === ===== ==== ====
Net interest earnings ......... $1,867 $1,675 $1,546 $ 192 $ 129 $ 219 $(23) $(4) $ 97 $ 11 $ 21
====== ====== ====== ===== ===== ===== ==== === ===== ==== ====
</TABLE>
LIABILITY AND ASSET MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income while a positive gap
would tend to adversely affect net interest income.
The asset/liability committee, which consists of the president and one other
director and certain other officers is charged with monitoring the liquidity
and funds position of Bank of East Ridge. The Committee regularly reviews (a)
the rate sensitivity position on a three-month, six-month, and one-year time
horizon; (b) loans to deposit ratios; and (c) average maturity for certain
categories of liabilities.
The following table represents an interest sensitivity profile for East
Ridge as of December 31, 1996. The table represents a static point in time and
does not consider other variables, such as changing spread relationships or
interest rate levels. "Net repricing gap" is the difference between total
earning assets and total interest bearing liabilities repricing in any given
period and "cumulative gap" is the sum of the net repricing gap from period to
period.
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<PAGE> 53
Since interest-bearing demand deposits and savings accounts do not reprice on a
regular basis, these balances have been included in the "After 5 years and
non-rate sensitive" category.
<TABLE>
<CAPTION>
After 5 years
Within After 3 months After 12 months and Non-rate
3 months Within 12 months Within 5 years Sensitive Total
-------- ---------------- -------------- --------- -----
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
EARNING ASSETS:
Loans ........................... $13,110 $ 1,537 $10,594 $ 33 $25,274
Investment securities ........... 586 1,518 3,947 4,723 10,774
Federal funds sold .............. 4,315 -- -- -- 4,315
------- -------- ------- -------- -------
Total earning assets ... $18,011 $ 3,055 $14,541 $ 4,756 $40,363
======= ======== ======= ======== =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits ....... $ 4,346 $ 10,856 $ 5,270 $ 15,107 $35,579
Other borrowed funds ............ -- -- 364 -- 364
------- -------- ------- -------- -------
Total interest-bearing
liabilities .......... $ 4,346 $ 10,856 $ 5,634 $ 15,107 $35,943
======= ======== ======= ======== =======
RATE SENSITIVITY GAP:
Net repricing gap ............... $13,665 $ (7,801) $ 8,907 $(10,351)
Net repricing gap as a percentage
of total earning assets ....... 33.86% -19.33% 22.07% -25.64%
Cumulative gap .................. $13,665 $ 5,864 $14,771 $ 4,420
Cumulative gap as a percentage of
total earning assets .......... 33.86% 14.53% 36.60% 10.95%
</TABLE>
DEPOSITS
East Ridge's primary sources of funds are interest bearing deposits.
The following table sets forth East Ridge's deposit structure at December 31,
in each of the last two years.
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
------ --------
<S> <C> <C>
(In thousands) Non interest-bearing deposits:
Individuals, partnerships and corporations........ $ 4,866 $ 4,189
U. S. Government and states and political subdivisions 110 110
Certified and official checks..................... 7 8
------- -------
Total non-interest-bearing deposits............. 4,983 4,307
Interest-bearing deposits:
Interest-bearing demand accounts.................. $ 8,548 $ 8,268
Saving accounts................................... 6,559 6,623
Certificates of deposit, less than $100,000....... 16,718 14,303
Certificates of deposit, more than $100,000....... 3,754 3,616
------ ------
Total interest-bearing deposits................. 35,579 32,810
Total deposits.................................. $40,562 $37,117
======= =======
</TABLE>
The following table presents a breakdown by category of the average
amount of deposits and the average rate paid on deposits for the periods
indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
------------ -------------
(Dollars in thousands)
<S> <C> <C>
Non interest-bearing deposits. $ 4,439 $ 3,802
Savings deposits.............. 6,500 3.51% 6,862 3,60%
Time deposits................. 18,684 5.76% 15,748 5.88%
Interest-bearing demand deposits 8,773 2.33% 8,214 2.40%
------ -------
Total deposits....... $38,396 $34,626
======= =======
</TABLE>
- 40 -
<PAGE> 54
At December 31, 1996, time deposits greater than $100,000 aggregated
approximately $3,754,000. The following table indicates, as of December 31,
1996, the dollar amount of $100,000 or more by the time remaining until
maturity (in thousands):
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
3 Months 3 to 12 1 to 5 Over 5
or less Months Years Years
-------- ------- ------ -------
<S> <C> <C> <C> <C>
Time certificates............ $760 $1,098 $1,896 --
</TABLE>
ASSETS
The management of East Ridge considers many criteria in managing
assets, including creditworthiness, diversification and structural
characteristics, maturity and interest rate sensitivity. The following table
sets forth East Ridge's interest-earning assets by category at December 31, in
each of the last two years.
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------- --------
<S> <C> <C>
(In thousands)
Interest-bearing deposits with banks
Investment securities............ $10,774 $13,119
Federal funds sold............... 4,315 575
Loans:
Real estate.................... 16,607 14,782
Commercial and other........... 8,667 7,932
------- -------
Total loans.................. 25,274 22,714
------- -------
Interest-earning assets ......... $40,363 $36,408
======= =======
</TABLE>
INVESTMENT PORTFOLIO
East Ridge has classified all investment securities as either
available for sale or held to maturity depending upon whether East Ridge has
the intent and ability to hold the investment securities to maturity. The
classification of certain investment securities as available for sale is
consistent with East Ridge's investment philosophy of maintaining flexibility
to manage the portfolio. At December 31, 1996, approximately $5.3 million of
investment securities were classified as available for sale. Approximately
$9,000 of unrealized gain was included in shareholders' equity related to the
available for sale investment securities.
At year end 1996, obligations of the United States Government or its
agencies and obligations of states and political subdivisions, including Fannie
Mae, Freddie Mac, Ginnie Mae and Small Business Administration loans
- 41 -
<PAGE> 55
represented approximately 97.4% of the total investment portfolio. The
following table presents the carrying amounts of East Ridge's investment
portfolio at December 31, in each of the last two years.
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
(In thousands)
AVAILABLE FOR SALE:
U.S. Treasury............. $ 1,841 $ 2,411
U.S. Government agencies.. 2,232 3,442
States and political
subdivisions........... 951 885
Other securities.......... 275 277
------- -------
Total available for sale.... $ 5,299 $ 7,015
------- -------
HELD TO MATURITY:
U.S. Government agencies.. $ 3,568 $ 4,345
States and political
subdivisions........... 1,907 1,759
------- -------
Total held to maturity...... $ 5,475 $ 6,104
------- -------
Total investment portfolio.. $10,774 $13,119
======= =======
</TABLE>
- 42 -
<PAGE> 56
The following table presents the maturity distribution of the carrying
value and estimated market value of East Ridge's investment portfolio at
December 31, 1996. The weighted average yields on these instruments are
presented based on final maturity. Yields on obligations of states and
political subdivisions have not been adjusted to a fully-taxable equivalent
basis.
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------
Estimated Weighted
Carrying Value Market Value Average Yield
-------------- ------------ -------------
<S> <C> <C> <C>
(In thousands)
AVAILABLE FOR SALE:
U.S. Treasuries:
Due within 1 year ................ $ 599 $ 602 6.34%
Due after 1 year but within 5
years .......................... 1,238 1,239 5.74%
------ ------
Total ........................ 1,837 1,841 5.93%
------ ------
U.S. Government agencies:
Due within 1 year ................ 234 235 6.22%
Due after 1 year but within 5
years ........................ 1,240 1,242 6.47%
Due after 5 years but within 10
years ........................ 200 198 7.22%
Due after 10 years ............... 556 557 6.95%
------ ------
Total ......................... 2,230 2,232 6.63%
------ ------
States and political subdivisions:
Due after 10 years ............... 937 951 5.32%
------ ------
Other:
Due after 10 years ............... 280 275 6.57%
------ ------
Total investments available for
sale ...................... $5,824 $5,299 6.15%
====== ======
HELD TO MATURITY:
U.S. Government agencies:
Due after 1 year but within 5
years ......................... $2,107 $2,086 5.82%
Due after 10 years ............... 1,461 1,457 6.13%
------ ------
Total ......................... 3,568 3,543 5.94%
------ ------
States and political subdivisions:
Due after 5 years but within 10
years ........................ 146 146 5.00%
Due after 10 years ............... 1,761 1,793 5.50%
------ ------
Total ........................ 1,907 1,939 5.46%
------ ------
Total investments held to
maturity .................. $5,475 $5,482 5.78%
====== ======
</TABLE>
INVESTMENT POLICY
The objective of East Ridge's investment policy is to invest funds not
otherwise needed to meet the loan demand of Bank of East Ridge's market area to
earn the maximum return for Bank of East Ridge, yet still maintain sufficient
liquidity to meet fluctuations in Bank of East Ridge's loan demand and deposit
structure. In doing so, East Ridge balances the market and credit risk against
the potential investment return, makes investments compatible with the pledge
requirements of Bank of East Ridge's deposits of public funds, maintains
compliance with regulatory investment requirements, and assists the various
public entities with their financing needs. The Investment Committee is
comprised of the president and three other directors. The president is
authorized to execute security transactions for the investment portfolio and to
make decisions on purchases and sales of securities. All the investment
transactions occurring since the previous board of directors' meeting are
reviewed by the board at its next monthly meeting. Limitations on the
Committee's investment authority include: (a) investment in any one municipal
security may not exceed 20% of equity capital; (b) the entire investment
portfolio may not increase or decrease by more than 10% in
- 43 -
<PAGE> 57
any one month; (c) investments in obligations of the State of Tennessee may not
exceed 30% of equity capital; and (d) investment in mortgage-backed securities
may not exceed more than 40% of equity capital. The investment policy allows
portfolio holdings to include short-term securities purchased to provide Bank
of East Ridge's needed liquidity and longer term securities purchased to
generate stable income for Bank of East Ridge during periods of interest rate
fluctuations.
LOAN PORTFOLIO
The following table sets forth the composition of East Ridge's loan
portfolio at December 31 in each of the past two years (in thousands).
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------- --------
<S> <C> <C>
Real estate loans:
Construction and land
development ............................. $ 1,112 $ 733
Secured by residential properties ........ 6,485 5,566
Other real estate loans ................... 9,010 8,483
------- -------
Total real estate loans ................. 16,607 14,782
Commercial and industrial loans ............. 4,329 3,602
Other consumer loans ........................ 3,901 3,936
All other loans ............................. 437 394
------- -------
Total loans .............................. 25,274 22,714
Less:
Allowance for loan losses ................... 296 307
------- -------
Net loans ................................ $24,978 $22,407
======= =======
</TABLE>
The following table summarizes certain information concerning East
Ridge's loan portfolio (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------
Amount % of Total Loans
------- -----------------
<S> <C>
Real estate loans:
Construction and land development ......... $ 1,112 4.40%
Secured by residential properties ......... 6,485 25.66%
Other real estate loans ................... 9,010 35.65%
------- -------
Total real estate loans ................ 16,607 65.71%
Commercial and industrial loans ............. 4,329 17.13%
Other consumer loans ........................ 3,901 15.43%
All other loans ............................. 437 1.73%
------- -------
Total loans ............................. 25,274 100.00%
=======
Less:
Allowance for loan losses ................... 296
-------
Net loans ............................... $24,978
=======
</TABLE>
- 44 -
<PAGE> 58
The following table sets forth maturities of the loan portfolio and
the sensitivity to interest rate changes of East Ridge's loan portfolio (in
thousands).
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------
Maturity Range
----------------------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
-------- ----------- ------------ -------
<S> <C> <C> <C> <C>
LOAN MATURITY:
Real estate construction loans ......... $1,112 $ -- $ -- $ 1,112
Real estate mortgage loans ............. 4,049 8,435 3,011 15,495
Commercial and industrial loans ........ 2,459 1,602 268 4,329
All other loans ........................ 667 3,441 230 4,338
------ ------- ------ -------
Total loans .......................... $8,287 $13,478 $3,509 $25,274
====== ======= ====== =======
LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates ......... $3,119 $10,594 $ 33 $13,746
Floating or adjustable interest
rates ............................ 5,168 2,884 3,476 11,528
------ ------- ------ -------
Total .............................. $8,287 $13,478 $3,509 $25,274
====== ======= ====== =======
</TABLE>
LOAN POLICY
All lending activities of Bank of East Ridge are under the direct
supervision and control of the East Ridge Board with secondary authority vested
in the Executive Committee. The Senior Loan Committee, which consists of the
president, one other director and two senior lending officers, enforces loan
authorizations for each officer, decides on loans exceeding such limits,
services all requests for officer credits to the extent allowable under current
laws and regulations, administers all problem credits, and determines the
allocation of funds for each lending division. The loan portfolio consists
primarily of real estate, commercial, small business, residential construction
and consumer installment loans. Maturity of term loans is normally limited to
15 years. Conventional real estate loans may be made up to 80% of the appraised
value or purchase cost of the real estate for no more than a 30-year term.
Installment loans are based on the earning capacity and vocational stability of
the borrower.
The Bank of East Ridge board at its regularly scheduled meetings
reviews all new loans made the preceding month. Loans which are 30 days or more
past due are reviewed monthly.
The Loan Committee of Bank of East Ridge periodically reviews the loan
portfolio, particularly nonaccrual and renegotiated loans. Each loan officer is
responsible for monitoring and collecting his or her own loan portfolio. Loan
Committee review may result in a determination that a loan should be placed on
a nonaccrual status for income recognition, subject to East Ridge Board appeal.
In addition, to the extent that management identifies potential losses in the
loan portfolio and reduces the book value of such loans through charge-offs, to
their estimated collectible value, East Ridge's policy is to classify as
nonaccrual any loan on which payment of principal or interest is 90 days or
more past due, where there is adequate collateral to cover principal and
accrued interest and the loan is in the process of collection. No concessions
are granted and late fees are collected. In addition, a loan will be classified
as nonaccrual if, in the opinion of the Loan Committee, based upon a review of
the borrower's or guarantor's financial condition, collateral value or other
factors, payment is questionable, even though payments are not 90 days or more
past due.
When a loan is classified as nonaccrual, any unpaid interest is
reversed against current income. Interest is included in income thereafter only
to the extent received in cash. The loan remains in a nonaccrual classification
until such time as the loan is brought current, when it may be returned to
accrual classification. When principal or interest on a nonaccrual loan is
brought current, if in management's opinion future payments are questionable,
the loan would remain classified as nonaccrual. After a nonaccrual or
renegotiated loan is charged off, any subsequent payments of either interest or
principal are applied first to any remaining balance outstanding, then to
recoveries and lastly to income.
- 45 -
<PAGE> 59
The large number of consumer installment loans and the relatively
small dollar amount of each makes an individual review impracticable. It is
East Ridge's policy to charge off any consumer installment loan which is past
due 90 days or more.
In addition, mortgage loans secured by real estate are placed on
nonaccrual status when the mortgagor is in bankruptcy, or foreclosure
proceedings are instituted. Any accrued interest receivable remains in interest
income as an obligation of the borrower.
CREDIT RISK MANAGEMENT AND RESERVE FOR LOAN LOSSES
Credit risk and exposure to loss are inherent parts of the banking
business. Management seeks to manage and minimize these risks through its loan
and investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures
that it believes reflect the risk sensitive nature of East Ridge. The loan
review procedures are set to monitor adherence to the established criteria and
to ensure that on a continuing basis such standards are enforced and
maintained.
Management's objective in establishing lending and investment
standards is to manage the risk of loss and to provide for income generation
through pricing policies. To effectuate this policy, East Ridge makes
commercial real estate loans with a three-year or less fixed maturity which may
be amortized over a maximum of 15 years.
The loan portfolio is regularly reviewed and management determines the
amount of loans to be charged-off. In addition, such factors as East Ridge's
previous loan loss experience, prevailing and anticipated economic conditions,
industry concentrations and the overall quality of the loan portfolio are
considered. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowances for losses on loans and real estate owned. Such agencies may
require East Ridge to recognize additions to the allowances based on their
judgments about information available at the time of their examinations. In
addition, any loan or portion thereof which is classified as a "loss" by
regulatory examiners is charged-off.
The reserve for loan losses is increased by provisions charged to
operating expense. The reserve is reduced by charging off loans or portions of
loans at the time they are deemed by management to be uncollectible and
increased when loans previously charged off are recovered. The resulting
reserve for loan losses is viewed by management as a single, unallocated
reserve available for all loans and, in management's opinion, is adequate to
provide for reasonably foreseeable potential loan losses. The risk associated
with loans varies with the creditworthiness of the borrower, the type of loan
(consumer, commercial or real estate) and its maturity. Cash flows adequate to
support a repayment schedule is an element considered for all types of loans.
Real estate loans are impacted by market conditions regarding the value of the
underlying property used as collateral. Commercial loans are also impacted by
the management of the business as well as economic conditions. The approximate
anticipated amount of loan charge-offs by category during 1997 is as follows:
Real Estate Loans $10,000
Commercial and industrial loans -
All other loans 48,000
-------
Total $56,000
=======
Management's estimate of charge-offs for 1997 is based upon historical
data as well as the composition of the loan portfolio at December 31, 1996.
Management believes the allowance for loan lossess is adequate to absorb
such anticipated charge-offs.
Rules and formulas relative to the adequacy of the reserve, although
useful as guidelines to management, are not rigidly applied. The reserve for
loan losses was $311,000 as of march 31, 1997, or 1.24% of loans outstanding.
The reserve for loan losses was $296,000 at year end 1996, or 1.17% of loans
outstanding compared to $307,000, or 1.35%, and $285,000, or 1.31%, at year
ends 1995 and 1994, respectively. The following table presents data related to
East Ridge's reserve for loan losses for the periods indicated.
- 46 -
<PAGE> 60
<TABLE>
<CAPTION>
Three Months Ended Year-to-Date
------------------ --------------------
March 31, 1997 1996 1995
------------------ ------- -------
(In thousands)
<S> <C> <C> <C>
Total loans:
Average outstanding during the period .............. $24,731 $24,237 $21,947
Allowance for loan losses:
Balance at beginning period ........................ $ 296 $ 307 $ 285
Charge-offs:
Real esstate loans ................................. -- -- --
Installment loans .................................. -- 18 21
Credit cards and related plans ..................... -- 8 3
Commercial and all other loans ..................... -- 32 10
------- ------- -------
0 58 34
------- ------- -------
Recoveries:
Real estate loans .................................. -- -- --
Installment loans .................................. 2 10 8
Credit cards and related plans 1 1 --
------- ------- -------
3 11 8
------- ------- -------
Net charge-offs (3) 47 26
Provision charged to income .......................... 12 36 48
------- ------- -------
Balance at end of period ............................. $ 311 $ 296 $ 307
Net charge-offs to average loans outstanding ......... -0.01% 0.19% 0.12%
Allowance for loan losses to average loans outstanding
1.26% 1.22% 1.40%
Allowance for loan losses to net charge-offs ......... 103.7X 6.30X 11.81X
</TABLE>
The following table sets forth information with respect to
nonperforming loans of East Ridge on the dates indicated. Accrual of interest
is discontinued when there is reasonable doubt as to the full, timely
collections of interest or principal. When a loan becomes contractually past
due ninety (90) days with respect to interest or principal, it is reviewed and
a determination is made as to whether it should be placed on nonaccrual status.
When a loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed against current period interest income. Income on
such loans is then recognized only to the extent that cash is received and
where the future collection of principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
principal and interest and when, in the judgment of management, the loans are
estimated to be fully collectible as to principal and interest. Restructured
loans are those loans on which concessions in terms have been granted because
of a borrower's financial difficulty. Interest is generally accrued on such
loans in accordance with the new terms. The information provided below is as of
December 31 for the years indicated (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Ended December 31,
------------------ ----------------------
March 31, 1997 1996 1995
------------------ ------- -------
<S> <C> <C> <C>
Nonaccrual loans ........................................... $ 6 $ -- $ --
Restructured loans ......................................... -- $ -- $ --
Loans past due 90 days or more to principal or
interest payments ......................................... $ 119 $ 13 $ 5
Nonperforming loans as a percentage of net loans before
allowance for loan losses ................................. 0.02% 0.05% 0.02%
Allowance for loan losses as a percentage of
nonperforming loans ....................................... 5183.33% 2276.92% 6140.00%
</TABLE>
CAPITAL RESOURCES/LIQUIDITY
Liquidity. Of primary importance to depositors, creditors and
regulators is the ability to have readily available funds sufficient to repay
fully maturing liabilities. East Ridge's liquidity, represented by cash and
cash due from banks,
- 47 -
<PAGE> 61
is a result of its operating, investing and financing activities. In order to
insure funds are available at all times, East Ridge devotes resources to
projecting on a monthly basis the amount of funds which will be required and
maintains relationships with a diversified customer base so funds are
accessible. Liquidity requirements can also be met through short-term
borrowings or the disposition of short-term assets which are generally matched
to correspond to the maturity of liabilities.
East Ridge has a formal liquidity policy, and in the opinion of
management, its liquidity levels are considered adequate. Neither East Ridge
nor Bank of East Ridge is subject to any specific regulation liquidity
requirements imposed by regulatory authorities. Bank of East Ridge is subject
to general FDIC guidelines which do not require a minimum level of liquidity.
Management believes its liquidity ratios meet or exceed these guidelines.
Management does not know of any trends or demands which are reasonably likely
to result in liquidity increasing or decreasing in any material manner.
The following table sets forth liquidity ratios for the periods
indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Average loans to average deposits........ 63.12% 63.38% 68.59%
</TABLE>
CAPITAL ADEQUACY
Capital adequacy refers to the level of capital required to sustain
asset growth over time and to absorb losses. The objective of East Ridge's
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures
used by management to monitor the results of these efforts are the ratios of
average equity to average assets, average tangible equity to average tangible
assets, and average equity to net loans.
The Federal Reserve Board has adopted capital guidelines governing the
activities of bank holding companies. These guidelines require the maintenance
of an amount of capital based on risk-adjusted assets so that categories of
assets with potentially higher credit risk will require more capital backing
than assets with lower risk. In addition, banks and bank holding companies are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance sheet activities such as loan commitments.
The capital guidelines classify capital into two tiers, referred to as
Tier I and Tier II. Under risk-based capital requirements, total capital
consists of Tier I capital which is generally common shareholders' equity less
goodwill and Tier II capital which is primarily a portion of the allowance for
loan losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
The framework for calculating risk-based capital requires banks and bank
holding companies to meet the regulatory minimums of 4% Tier I and 8% total
risk-based capital.
In 1990 regulators added a leverage computation to the capital
requirements, comparing Tier I capital to total average assets less goodwill.
- 48 -
<PAGE> 62
<TABLE>
<CAPTION>
December 31, 1996
----------------------
(Dollars in thousands)
<S> <C>
CAPITAL:
Tier I capital:
Stockholders' equity .................... $ 3,038
Less disallowed intangibles ............. --
-------
Total Tier I capital ........... $ 3,038
Tier II capital:
Qualifying debt ......................... $ --
Qualifying allowance for loan losses .... 296
-------
Total Tier II capital .......... $ 3,334
-------
Total capital .................. $ 3,334
-------
Risk-adjusted assets ............................. $27,875
Quarterly average assets ......................... $43,190
RATIOS:
Tier I capital to risk-adjusted assets ........... 10.90%
Tier II capital to risk-adjusted assets .......... 11.96%
Total capital to risk-adjusted assets ............ 11.96%
Leverage-- Tier I capital to quarterly
average assets less disallowed intangibles ..... 7.03%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") established five capital categories for banks and bank holding
companies. The bank regulators adopted regulations defining these five capital
categories in September 1992. Under these new regulations each bank is
classified into one of the five categories based on its level of risk-based
capital as measured by Tier I capital, total risk-based capital, and Tier I
leverage ratios and its supervisory ratings.
The following table lists the five categories of capital and each of
the minimum requirements for the three risk-based capital ratios.
<TABLE>
<CAPTION>
Total Risk-Based Tier I Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
---------------- ----------------- -------------
<S> <C> <C> <C>
Well-capitalized...................................... 10% or above 6% or above 5% or above
Adequately capitalized................................ 8% or above 4% or above 4% or above
Undercapitalized...................................... Less than 8% Less than 4% Less than 4%
Significantly undercapitalized........................ Less than 6% Less than 3% Less than 3%
Critically undercapitalized........................... -- -- 2% or less
</TABLE>
On March 31, 1997, East Ridge exceeded the regulatory minimums and
qualified as a well-capitalized institution under the regulations.
- 49 -
<PAGE> 63
BUSINESS OF EAST RIDGE
GENERAL
East Ridge, incorporated in Tennessee, is a bank holding company that
commenced operations in 1983. Its principal asset is the capital stock of Bank
of East Ridge. At March 31, 1997, East Ridge had total assets of $44.5
million and stockholders' equity of $3.1 million. Bank of East Ridge, East
Ridge's wholly-owned subsidiary, is a Tennessee banking corporation. Bank of
East Ridge provides a variety of banking and financial services to businesses
and individuals. Bank of East Ridge's headquarters and principal banking office
is located at 4154 Ringgold Road, Chattanooga, Tennessee 37412-0416. In
addition, Bank of East Ridge has two branches located in Foodmax Supermarkets
at 2290 Gunbarrel Road and 4976 Highway 58 in Chattanooga, Tennessee.
EMPLOYEES
As of March 31, 1997, East Ridge had approximately 25 full-time
employees. The employees are not represented by a collective bargaining unit.
East Ridge believes its relationship with its employees to be good.
CUSTOMERS
It is the opinion of management that there is no single customer or
affiliated group of customers whose deposits, if withdrawn, would have a
materially adverse effect on the business of East Ridge.
PROPERTIES
East Ridge has its principal offices in its headquarters building at
4154 Ringgold Road, Chattanooga, Tennessee 37412-0416, which is owned and
occupied by Bank of East Ridge. Bank of East Ridge leases the space in which it
operates two branches in Foodmax Supermarkets. These branches each are
comprised of approximately 450 square feet in each supermarket and are leased
pursuant to lease agreements entered into in August and November 1992 for
initial five year terms. Each lease provides two five year extensions. Bank of
East Ridge has renewed each such lease for the first renewal period.
LEGAL PROCEEDINGS
The nature of its business generates a certain amount of litigation
against East Ridge and Bank of East Ridge involving matters arising in the
ordinary course of business. None of the legal proceedings currently pending or
threatened to which East Ridge or Bank of East Ridge is a party or to which any
of their properties are subject will have, in the opinion of management of East
Ridge, a material effect on the business or financial condition of East Ridge
or Bank of East Ridge.
BANKING
Bank of East Ridge conducts its business as a commercial bank, with
special emphasis in retail banking, including the acceptance of checking and
savings deposits, and the making of commercial, real estate, personal, home
improvement, automobile and other installment and term loans. It also offers
collections, notary public services, and other customary bank services to its
customers.
COMPETITION
All phases of East Ridge's banking activities are highly competitive.
Bank of East Ridge competes actively with nine commercial banks in Tennessee,
and at least four commercial banks in Georgia, as well as finance
- 50 -
<PAGE> 64
companies, credit unions and other financial institutions located in its
service area, which includes Hamilton County in Tennessee and Catoosa and
Walker Counties in Georgia.
SUPERVISION AND REGULATION
East Ridge is a bank holding company within the meaning of the federal
Bank Holding Company Act of 1956, as amended (the "Act"), and is registered
with the Board of Governors of the Federal Reserve System (the "Board"). East
Ridge is required to file with the Board annual reports and such additional
information as the Board may require pursuant to the Act. The Board may also
make examinations of East Ridge and its subsidiaries. The following summary of
the Act and of the other acts described herein is qualified in its entirety by
express reference to each of the particular acts.
The Act requires every bank holding company to obtain the prior
approval of the Board before acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any bank which is not majority owned by
East Ridge. The Act prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
outstanding voting shares of any company which is not a bank and from engaging
in any business other than banking or furnishing services to or performing
services for its subsidiaries. The 5% limitation is not applicable to ownership
of shares in any company the activities of which the Board has determined to be
so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
Subject to limited exceptions, the Act prohibits the direct or
indirect acquisition by a bank holding company or any of its subsidiaries of
more than five percent of the voting shares or substantially all of the assets
of a bank located outside the state in which the operations of its banking
subsidiaries are principally conducted, unless the acquisition is specifically
authorized by a statute of the state in which the bank to be acquired is
located. The Tennessee Reciprocal Banking Act was amended, effective January 1,
1991, generally to permit nationwide reciprocal interstate banking.
Bank of East Ridge is an "affiliate" of East Ridge within the meaning
of the Federal Reserve Act. This act places restrictions on a bank's loans or
extensions of credit to, purchases of or investments in the securities of, and
purchases of assets from an affiliate, a bank's loans or extensions of credit
to third parties collateralized by the securities or obligations of an
affiliate, the issuance of guarantees, acceptances, and letters of credit on
behalf of an affiliate, and certain bank transactions with an affiliate, or
with respect to which an affiliate acts as agent, participates, or has a
financial interest. Furthermore, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
Under Federal Reserve Board policy, East Ridge is expected to act as a
source of financial strength to its subsidiary bank and to commit resources to
support its subsidiary. This support may be required at times when, absent such
Federal Reserve Board policy, East Ridge may not be inclined to provide it.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), a depository institution insured by the FDIC can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC after
August 9, 1989 in connection with (a) the default of a commonly controlled
FDIC-insured depository institution or (b) any assistance provided by the FDIC
to any commonly controlled FDIC-insured depository institution "in danger of
default." "Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a default is likely to occur in the absence
of regulatory assistance. Under FDICIA (see discussion below) a bank holding
company may be required to guarantee the capital plan of an undercapitalized
depository institution. Any capital loans by a bank holding company to any of
its subsidiary banks are subordinate in right of payment to deposits and to
certain other indebtedness of such subsidiary bank. In the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain the capital of a subsidiary bank
will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
- 51 -
<PAGE> 65
Bank of East Ridge is a member of the FDIC and is subject to
examination and regulation by that authority. Bank of East Ridge is chartered
under the banking laws of the State of Tennessee and is subject to the
supervision of, and regular examination by, the TDFI.
The Tennessee Reciprocal Banking Act requires the filing of an
application with and the approval of the Tennessee Commissioner of Financial
Institutions to acquire a Tennessee bank or bank holding company.
Tennessee law was amended in 1990 to permit branch banking in any
county in the state. Prior to the amendment, statewide branching was possible
pursuant to a May 1988 federal court decision.
In December 1991, a major banking bill entitled the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted, which
substantially revises the bank regulatory and funding provisions of the Federal
Deposit Insurance Act and makes revisions to several other federal banking
statutes. Among other things, FDICIA requires the federal banking regulators to
take "prompt corrective action" in respect of depository institutions that do
not meet minimum capital requirements. The Bank of East Ridge has capital
levels well above the minimum requirements. In addition, an institution that is
not well capitalized is generally prohibited from accepting brokered deposits
and offering interest rates on deposits higher than the prevailing rate in its
market and also may not be able to "pass through" insurance coverage for
certain employee benefit accounts. FDICIA also requires the holding company of
any undercapitalized depository institution to guarantee, in part, certain
aspects of such depository institution's capital plan for such plan to be
acceptable. FDICIA contains numerous other provisions, including new
accounting, audit and reporting requirements, termination of the "too big to
fail" doctrine except in special cases, limitations on the FDIC's payment of
deposits at foreign branches, new regulatory standards in such areas as asset
quality, earnings and compensation and revised regulatory standards for, among
other things, powers of state banks, real estate lending and capital adequacy.
FDICIA also requires that a depository institution provide 90 days prior notice
of the closing of any branches.
EFFECT OF GOVERNMENTAL POLICIES
East Ridge and Bank of East Ridge are affected by the policies of
regulatory authorities, including the Federal Reserve System. An important
function of the Federal Reserve System is to regulate the national money
supply. Among the instruments of monetary policy used by the Federal Reserve
are: purchases and sales of U.S. Government securities in the marketplace;
changes in the discount rate, which is the rate any depository institution must
pay to borrow from the Federal Reserve; and changes in the reserve requirements
of depository institutions. These instruments are effective in influencing
economic and monetary growth, interest rate levels and inflation.
The monetary policies of the Federal Reserve System and other
governmental policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future. Because of changing conditions in the national economy and in the money
market, as well as the result of actions by monetary and fiscal authorities, it
is not possible to predict with certainty future changes in interest rates,
deposit levels, loan demand or the business and earnings of East Ridge or
whether the changing economic conditions will have a positive or negative
effect on operations and earnings.
Bills are pending before the United States Congress and the Tennessee
General Assembly which could affect the business of East Ridge and Bank of East
Ridge, and there are indications that other similar bills may be introduced in
the future. It cannot be predicted whether or in what form any of these
proposals will be adopted or the extent to which the business of East Ridge and
Bank of East Ridge may be affected thereby.
- 52 -
<PAGE> 66
MANAGEMENT OF EAST RIDGE
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information regarding directors,
all of whom are nominees for reelection to serve as members of the East Ridge
Board.
<TABLE>
<CAPTION> DIRECTOR PRINCIPAL OCCUPATION
NAME AGE POSITIONS SINCE FOR PREVIOUS 5 YEARS
<S> <C> <C> <C> <C>
James L. Eidson, Sr............... 78 Director 1984 Owner/Eidson's Restaurant
Jason D. Helton, Jr............... 66 Director 1984 Retired
William B. Luther................. 64 Director 1984 Attorney
James D. Renegar.................. 59 Chairman of the Board and 1984 Bank President
President 1984
Paul M. Starnes................... 62 Director 1984 Health and Education
Consultant
Bank's Chief Executive
David E. Young.................... 62 Director 1984 Officer
</TABLE>
No director of East Ridge is related to any other director. David E.
Young is not related to James R. Young, Jr., identified below as Senior Vice
President of Bank of East Ridge. No director of East Ridge is a director or
executive officer of another bank holding company, bank, savings and loan
association, or credit union. The following is a brief description of the
business experience of certain executive officers of East Ridge.
DAVID E. YOUNG (62), is the Chairman of the Board of Bank of East
Ridge and a director of East Ridge. Mr. Young was Chairman of the Board of Bank
of East Ridge during its organization in 1984 and 1985 and was employed by Bank
of East Ridge in 1990 as its Chief Executive Officer.
JAMES D. RENEGAR (59), is the Chairman of East Ridge and President of
Bank of East Ridge. Mr. Renegar was an organizer of Bank of East Ridge and has
been its President since the bank opened in 1985. He received a B.S. degree from
the University of Chattanooga and is a graduate of the School for Bank
Administration at the University of Wisconsin.
JAMES R. YOUNG, JR. (52), Senior Vice President of Bank of East Ridge
has been employed by Bank of East Ridge since 1986. Mr. Young attended the
University of Tennessee at Chattanooga and has completed Tennessee Bankers
Commercial Lending School and Tennessee Young Bankers School. He has completed a
number of American Institute of Banking courses.
DANIEL O. CRYE (49), Vice President of Bank of East Ridge, joined
Bank of East Ridge in 1992. He is a graduate of the University of Tennessee and
the Graduate School of Retail Bank Managment at the University of Virginia.
TRANSACTIONS WITH MANAGEMENT
East Ridge has and expects to have in the future banking and other
business transactions in the ordinary course of its banking business with
directors, officers, and 10% beneficial owners of East Ridge and their
affiliates, including members of their families or corporations, partnerships,
or other organizations in which such officers or directors have a controlling
interest, on substantially the same terms (including price, or interest rates
and collateral) as those prevailing at the time for comparable transactions
with unrelated parties. Any such banking transactions will not involve more
than the normal risk of collectibility nor present other unfavorable features
to East Ridge.
- 53 -
<PAGE> 67
SECURITIES LAW LIMITATIONS
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to directors,
officers and controlling persons of East Ridge, East Ridge has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
THE EAST RIDGE BOARD AND ITS COMMITTEES
Directors of East Ridge and Bank of East Ridge are elected annually
and each director holds office until his or her successor is elected and
qualified. Committees of the board of Bank of East Ridge and their members
include Executive Committee (Messrs. Luther, Renegar, Young, Helton and
Eidson); Senior Loan Committee (Messrs. Young, Renegar, James Young and Crye);
Assets/Liability Committee (Messrs. Renegar, David E. Young and James Young and
Crye); Audit Committee (Messrs. Young, Eidson, Helton and Luther); and
Personnel Committee (Messrs. Helton, Starnes and Eidson).
EXECUTIVE COMPENSATION
The Summary Compensation Table provides information for the years
indicated about the Chief Executive Officer ("CEO"). No other executive officer
of East Ridge or Bank of East Ridge received compensation in excess of $100,000
for the year ended December 31, 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------
(a) (b) (c) (d)
Name and Principal Position Year Salary ($) Bonus ($)
--------------------------- ---- ---------- ---------
<S> <C> <C> <C>
1996 $85,650 $15,000
David E. Young 1995 78,320 --
Chairman and CEO of Bank of East Ridge 1994 73,579 --
</TABLE>
COMPENSATION OF DIRECTORS
During 1996, each director received $100 per meeting attended, with the
exception of Mr. Luther who serves as secretary to the East Ridge Board and who
received $200 per meeting attended. Directors are not compensated for committee
meetings.
OWNERSHIP OF EAST RIDGE COMMON STOCK
As of July __, 1997, East Ridge's records indicated the following
number of shares were beneficially owned by (i) all persons who own
beneficially 5% or more of the East Ridge Common Stock, (ii) each person who is
a director or a named executive officer of East Ridge and (iii) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
Amount and Nature
Name of of Beneficial Ownership Percent
Beneficial Owner (Number of Shares) of Class
---------------- ------------------ --------
<S> <C> <C>
(i) David E. Young 76,139 69.8%
(ii) David E. Young 76,139 69.8%
James L Eidson, Sr. 100 *
James D. Renegar 2,504 2.3%
Jason D. Helton, Jr. 90 *
William B. Luther 2,420 2.2%
</TABLE>
- 54 -
<PAGE> 68
<TABLE>
<S> <C> <C>
Paul M. Starnes 2,091 1.9%
(iii) Directors and executive
officers as a group (6 persons) 83,344 76.44%
</TABLE>
- ----------------
* Less than 1%.
DESCRIPTION OF EAST RIDGE COMMON STOCK
East Ridge is authorized by its charter (the "Charter") to issue a
maximum of 150,000 shares of common stock, $10.00 par value (the "East Ridge
Common Stock") of which 109,030 were outstanding at July 25, 1997. The holders
of East Ridge Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Cumulative voting is
not allowed. Holders of East Ridge Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the East Ridge out of funds
legally available therefore and, in the event of liquidation, dissolution or
winding up of East Ridge, will be entitled to share ratably in all assets
remaining after payment of liabilities. Holders of East Ridge Common Stock will
have no preemptive rights. Holders of East Ridge Common Stock will have no
right to convert their East Ridge Common Stock into any other securities. All
shares of East Ridge outstanding are fully paid and nonassessable. Bank of East
Ridge acts as the transfer agent and registrar for East Ridge Common Stock.
Holders of the East Ridge Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the East Ridge Board from funds
legally available whether in cash or stock; provided, however, that the
declaration and payment of dividends by the East Ridge Board shall be subject
to the rules and regulations of the Federal Reserve governing the amount of
dividends which may be paid to shareholders, the manner in which dividends are
paid, and the methods, if any, by which capital stock and surplus may be
retired and reduced.
- 55 -
<PAGE> 69
INFORMATION CONCERNING CORNERSTONE
SELECTED FINANCIAL DATA FOR CORNERSTONE
The following table presents for Cornerstone, on a historical basis,
selected financial data and ratios. This information is based on the financial
statements of Cornerstone included herein and should be read in conjunction
therewith and with the notes thereto. See "Summary -- Equivalent and Pro Forma
Share Data" and "-- Selected Financial Data and Ratios," and "Index to
Financial Statements of Cornerstone Community Bank."
<TABLE>
<CAPTION>
From Inception
(January 23, 1996)
March 31, Through December 31,
1997 1996
--------- -------------------
<S> <C> <C>
(Dollars in thousands except per share data)
SUMMARY INCOME STATEMENTS:
Interest income ................................................. $ 671 $ 1,231
Less interest expense ........................................... 347 449
------ --------
Net interest income ............................................. 324 782
Provision for loan losses ....................................... 80 201
------ --------
Net interest income after provision for loan losses ............. 244 581
Noninterest income .............................................. 24 38
------ --------
Adjusted gross income after provision for loan losses ........... 268 619
Noninterest expense ............................................. 262 1,264
------ --------
Income before income taxes ...................................... 6 (645)
Applicable income taxes ......................................... (5) (131)
------ --------
Net income (loss) ............................................... $ 11 $ (514)
====== ========
COMMON STOCK DATA:
Net income (loss) per common share .............................. .02 (0.87)
Cash dividends declared per common share ........................ -- --
SELECTED AVERAGE BALANCES:
Total assets .................................................... $33,102 $ 16,089
Total loans ..................................................... 20,037 9,495
Investment securities ........................................... 8,319 2,042
Earning assets .................................................. 32,006 14,595
Deposits ........................................................ 27,475 10,776
Shareholders' equity ............................................ 5,386 5,277
Shares outstanding (thousands) .................................. 590 590
SELECTED PERIOD-END BALANCES:
Total assets .................................................... $36,329 $ 28,298
Total loans ..................................................... 22,475 16,113
Securities ...................................................... 8,919 6,204
Earning assets .................................................. 34,710 25,623
Deposits ........................................................ 30,814 22,779
Shareholders' equity ............................................ 5,368 5,377
Shares outstanding (thousands) .................................. 590 590
SELECTED RATIOS:
Return on average equity(1)...................................... 0.82% -9.74%
Return on average assets(1)...................................... 0.14% -3.20%
Net interest margin ............................................. 2.89% 3.77%
Allowance for loan losses to loans .............................. 1.25% 1.25%
Net charge-offs to average loans ................................ 0% 0%
Average equity to average assets ................................ 16.27% 32.80%
</TABLE>
- ---------
(1) Information for March 31, 1997 has been annualized.
- 56 -
<PAGE> 70
CORNERSTONE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Cornerstone's Management's Discussion and Analysis of Financial
Condition and Results of Operations covers the period from inception (January
23, 1996) through December 31, 1996 and should be read in conjunction with the
information and tables which follow. For a discussion of liquidity and the
impact of inflation, see "Capital Resources/Liquidity" below.
RESULTS OF OPERATIONS --FROM INCEPTION (JANUARY 23, 1996) THROUGH DECEMBER 31,
1996
During the period from January 23, 1996 (the date Cornerstone
operations began) to December 31, 1996, Cornerstone experienced steady growth
in loans, deposits and total assets. As of December 31, 1996, total loans were
$16.1 million; total deposits were $22.7 million; and total assets were $28.2
million. Net loss for the year ended December 31, 1996 was $(514,127) or
$(0.87) per share.
NET INTEREST INCOME
The following table sets forth weighted yields earned by Cornerstone
on its earning assets and the weighted average rates paid on its deposits and
other interest-bearing liabilities for the three months ended March 31, 1997
and the period from inception (January 23, 1996) through December 31, 1996.
<TABLE>
<CAPTION>
Inception (January 23, 1996)
March 31, 1997 through December 31, 1996
---------------------------------- ---------------------------------------
Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/
(Fully taxable equivalent) (Dollars in thousands) Balance Expense Rates Balance Expense Rates
---------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans net of unearned income .......................... $ 20,037 $ 496 9.90% $ 9,495 $ 969 10.21%
Other investments ..................................... 8,319 130 6.25% 2,042 117 5.73%
Interest-bearing deposits with banks ................. 1,200 15 5.00% 1,940 96 4.95%
Federal funds sold .................................... 2,450 30 4.90% 1,118 49 4.38%
-------- ------ -------- ------
Total interest-earning assets/interest income ..... 32,006 671 8.39% 14,595 1,231 8.43%
-------- --------
Cash and due from banks ............................... 70 437
Other assets .......................................... 1,250 1,166
Allowance for loan losses ............................. (224) (109)
-------- --------
Total ............................................. $ 33,102 $ 16,089
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits ....................................... $ 890 $ 5 2.25% $ 507 $ 9 1.78%
Savings ............................................... 1,989 19 3.82% 1,094 35 3.20%
Time certificates ..................................... 22,325 323 5.79% 8,038 405 5.04%
-------- ------ ------
Total interest-bearing liabilities/interest expense 25,204 347 5.50% 9,639 449 4.66%
-------- ------ -------- ------
Non interest-bearing demand deposits ................. 2,271 1,167
Other liabilities ..................................... 241 6
Shareholders' equity .................................. 5,386 5,277
-------- --------
Total ............................................. $ 33,102 $ 16,089
======== ========
Net interest earnings ................................. $ 324 $ 782
===== =====
Net interest on interest-earning assets .............. 4.05% 5.36%
</TABLE>
- 57 -
<PAGE> 71
LIABILITY AND ASSET MANAGEMENT
The matching of assets and liabilities may be analyzed by examining
the extent to which such assets and liabilities are "interest rate sensitive"
and by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income while a positive gap
would tend to adversely affect net interest income.
The asset/liability committee, which consists of the chief executive
officer, president and four other directors are charged with monitoring the
liquidity and funds position of Cornerstone. The committee regularly reviews
(a) the rate sensitivity position on a three-month, six-month, and one-year
time horizon; (b) loans to deposit ratios; and (c) average maturity for certain
categories of liabilities.
Cornerstone operates an internal asset/liability management model. No
estimates of the impact of changing interest rates on historical or projected
earnings are available. The current level of interest rate risk can, however,
be inferred from maturity and repricing data. At March 31, 1997, Cornerstone
had a positive cumulative repricing gap within one year of approximately $4.3
million, or approximately 11.84% of total assets. This positive repricing gap
indicates that Cornerstone's future earnings may be adversely impacted by a
fall in market interest rates. Such an impact would primarily be felt in the
twelve-month period after a fall in rates.
The following tables represent an interest sensitivity profile for
Cornerstone as of March 31, 1997 and December 31, 1996. The tables represent a
static point in time and do not consider other variables, such as changing
spread relationships or interest rate levels. "Net repricing gap" is the
difference between total earning assets and total interest bearing liabilities
repricing in any given period and "cumulative gap" is the sum of the net
repricing gap from period to period. Interest-bearing demand, savings and money
market account deposits are presented as repricing in the earliest period
presented.
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------------------------
Within After 3 months After 12 months
3 months Within 12 months Within 5 years After 5 years Total
-------- ---------------- --------------- ------------- -----
(Dollars in thousands)
EARNING ASSETS:
<S> <C> <C> <C> <C> <C>
Loans ........................................... $12,870 $ 1,866 $ 7,359 $ 380 $22,475
Investment securities ........................... 265 6,095 2,446 113 8,919
Other earning assets ............................ 926 -- -- -- 926
Federal funds sold .............................. 1,850 -- -- -- 1,850
------- ------- ------- ------- -------
Total earning assets ................... $15,911 $ 7,961 $ 9,805 $ 493 $34,170
======= ======= ======= ======= =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits ....................... $ 7,728 $11,844 $ 8,917 $ -- $28,489
------- ------- ------- ------- =======
Total interest-bearing liabilities $ 7,728 $11,844 $ 8,917 $ -- $28,489
======= ======= ======= ======= =======
RATE SENSITIVITY GAP:
Net repricing gap ............................... $ 8,183 $(3,883) $ 888 $ 493 $ 5,681
Net repricing gap as a percentage of total
assets ........................................ 22.52% (10.69)% 2.44% 1.36% 15.64%
Cumulative gap .................................. $ 8,183 $ 4,300 $ 5,188 $ 5,681 $ 5,681
Cumulative gap as a percentage of
total assets .................................. 22.52% 11.84% 14.28% 15.64% 15.64%
<CAPTION>
December 31, 1996
--------------------------------------------------------------------
Within After 3 months After 12 months
3 months Within 12 months Within 5 years After 5 years Total
-------- ---------------- --------------- ------------- -----
(Dollars in thousands)
EARNING ASSETS:
<S> <C> <C> <C> <C> <C>
Loans ........................................... $ 9,741 $ 1,000 $ 5,002 $ 370 $16,113
Investment securities ........................... 228 4,607 1,255 114 6,204
Other earning assets ............................ 1,023 1,023
Federal funds sold .............................. 2,300 2,300
------- ------- ------- ------- -------
Total earning assets ................... $13,292 $ 5,607 $ 6,257 $ 484 $25,640
======= ======= ======= ======= =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits ....................... $ 7,367 $ 6,066 $ 7,698 $ -- $21,131
------- ------- ------- ------- =======
Total interest-bearing liabilities $ 7,367 $ 6,066 $ 7,698 $ -- $21,131
======= ======= ======= ======= =======
RATE SENSITIVITY GAP:
Net repricing gap ............................... $ 5,925 $ (459) $(1,441) $ 484 $ 4,509
Net repricing gap as a percentage of total
assets ........................................ 20.94% (1.62)% (5.09)% 1.71% 15.93%
Cumulative gap .................................. $ 5,925 $ 5,466 $ 4,025 $ 4,509 $ 4,509
Cumulative gap as a percentage of
total assets .................................. 20.94% 19.32% 14.22% 15.93% 15.93%
</TABLE>
- 58 -
<PAGE> 72
Management has made the following assumptions in the above analysis: (i) Assets
and liabilities are generally assigned to a period based upon their earliest
repricing period when the repricing is less than the contractual maturity; (ii)
Investment securities available for sale are currently treated in the same
manner as comparable securities in the investment securities held to maturity
portfolio in that they are scheduled according to the earlier of their
contractual maturities or earliest repricing dates; and (iii) Interest-bearing
demand deposits, money market deposits and savings deposits that have no
contractual maturities are scheduled in the within 3 months category.
DEPOSITS
Cornerstone's primary sources of funds are interest bearing deposits.
The following table sets forth Cornerstone's deposit structure at March 31,
1997 and December 31, 1996.
<TABLE>
<CAPTION> March 31, December 31,
1997 1996
--------- ------------
(In thousands)
<S> <C> <C>
Non interest-bearing deposits:
Individuals, partnerships and corporations ....... $ 2,214 $ 1,278
Certified and official checks .................... 111 370
------- -------
Total non interest-bearing deposits ............ 2,325 1,648
Interest-bearing deposits:
Interest-bearing demand accounts ................. 980 814
Savings accounts ................................. 2,038 2,818
Certificates of deposit, less than $100,000 ...... 15,918 11,144
Certificates of deposit, $100,000 or more ........ 9,553 6,355
------- -------
Total interest-bearing deposits ................ 28,489 21,131
------- -------
Total deposits ................................. $30,814 $22,779
======= =======
</TABLE>
The following table presents a breakdown by category of the average
amount of deposits and the average rate paid on deposits for the period
indicated:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------------- ----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non interest-bearing deposits ...... $ 2,271 $ 1,167
Savings deposits ................... 1,989 3.82% 1,064 3.29%
Time deposits ...................... 22,325 5.79% 8,038 5.04%
Interest-bearing demand deposits ... 890 2.25% 507 1.78%
------- -------
Total deposits ............ $27,475 $10,776
======= =======
</TABLE>
At March 31, 1997 and December 31, 1996, time deposits of $100,000 or
more aggregated approximately $9.6 million and $6.3 million, respectively. The
following table indicates, as of March 31, 1997 and December 31, 1996, the
dollar amount of $100,000 or more by the time remaining until maturity (in
thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------------------------- -------------------------------------------
3 Months 3 to 12 1 to 5 3 Months 3 to 12 1 to 5 Over 5
or less Months Years or less Months Years Years
------ ------ ------ -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Time certificates........................ $2,215 $3,947 $3,391 $1,189 $2,854 $2,312 $ --
</TABLE>
- 59 -
<PAGE> 73
ASSETS
Management of Cornerstone considers many criteria in managing assets,
including creditworthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth
Cornerstone's interest-earning assets by category at March 31, 1997 and
December 31, 1996.
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(In thousands)
<S> <C> <C>
Interest-bearing deposits with banks ...... $ 1,207 $ 1,207
Investment securities held to maturity .... 7,050 4,279
Investment securities available for sale . 1,869 1,925
Federal funds sold ........................ 1,850 2,300
Loans:
Real estate ............................. 16,949 11,979
Commercial and other .................... 5,726 4,134
------- -------
Total loans ........................... 22,475 16,113
Provision for loan losses ............. 281 201
------- -------
Loans, net .............................. 22,194 15,912
------- -------
Interest-earning assets ................... $34,170 $25,623
======= =======
</TABLE>
INVESTMENT PORTFOLIO
At December 31, 1996, obligations of the United States Government or
its agencies represented 81.6% of the investment portfolio. The following table
presents the composition of the book value (historical amortized cost basis) of
Cornerstone's investment portfolio at March 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(In thousands)
<S> <C> <C>
AVAILABLE FOR SALE:
Obligations of U.S. Government agencies ............... $1,869 $1,925
HELD TO MATURITY:
Obligations of U.S. Government agencies ............... 6,088 3,137
Other investment securities ........................... 962 1,142
------ ------
Total investment securities held to maturity ..... $7,050 $4,279
------ ------
Total investment portfolio ...................... $8,919 $6,204
====== ======
</TABLE>
The following table presents the maturity distribution of the book
value and estimated market value of Cornerstone's investment portfolio at
March 31, 1997 and December 31, 1996. The weighted average yields on these
instruments are presented based on final maturity.
- 60 -
<PAGE> 74
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------------------------------------- ------------------------------------------
Estimated Weighted Estimated Weighted
Book Value Market Value Average Yield Book Value Market Value Average Yield
---------- ------------ ------------- ---------- ------------ -------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Obligations of U.S. Government agencies:
Due after 1 year but within 5 years ... $1,809 $1,869 5.00% $1,925 $1,925 5.00%
HELD TO MATURITY:
Obligations of U.S. Government agencies:
Due after 1 year but within 5 years ... $6,088 $6,077 6.72% $3,137 $3,157 6.63%
------ ------ ------ ------
Other investment securities:
Due within 1 year .................... 762 761 7.57% 913 916 7.43%
Due after 1 year but within 5 years .. 200 200 7.09% 229 230 7.37%
------ ------ ------ ------
Total .............................. $8,919 $8,907 6.35% $6,204 $6,228 6.25%
====== ====== ====== ======
</TABLE>
INVESTMENT POLICY
The objective of Cornerstone's investment policy is to invest funds
not otherwise needed to meet the loan demand of Cornerstone's market area to
earn the maximum return for Cornerstone, yet still maintain sufficient
liquidity to meet fluctuations in Cornerstone's loan demand and deposit
structure. In doing so, Cornerstone balances the market and credit risks
against the potential investment return, makes investments compatible with the
pledge requirements of Cornerstone's deposits of public funds, maintains
compliance with regulatory investment requirements, and assists the various
public entities with their financing needs. The president is authorized to
execute security transactions for the investment portfolio based on the
decisions of the asset/liability committee. All the investment transactions
occurring since the previous board of directors' meeting are reviewed by the
board at its next monthly meeting, in addition to the entire portfolio. The
investment policy allows portfolio holdings to include short-term securities
purchased to provide Cornerstone's needed liquidity and longer term securities
purchased to generate stable income for Cornerstone during periods of interest
rate fluctuations.
LOAN PORTFOLIO
The following table summarizes certain information concerning
Cornerstone's loan portfolio (in thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
--------------------------- ---------------------------
Amount % of Total Loans Amount % of Total Loans
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Real estate loans:
Construction and land development $ 5,254 23.38% $ 4,449 27.61%
Secured by residential properties 4,908 21.84 3,144 19.51
Other real estate loans ......... 6,587 29.31 4,386 27.22
------- -------
Total real estate loans ....... 16,749 74.52 11,979 74.34
Commercial and industrial loans ... 3,481 15.49 2,316 14.37
Consumer loans .................... 1,289 5.74 1,071 6.65
All other loans ................... 956 4.25 747 4.64
------- -------
Total loans ................... $22,475 $16,113
======= =======
</TABLE>
61
<PAGE> 75
The following tables set forth maturities of the loan portfolio and
the sensitivity to interest rate changes of Cornerstone's loan portfolio (in
thousands).
<TABLE>
<CAPTION>
March 31, 1997
-------------------------------------------------------------------------
Maturity Range
-------------------------------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Real estate construction loans .... $12,797 $ -- $ -- $12,797
Real estate mortgage loans ........ -- -- 4,908 4,908
Commercial and industrial loans ... -- 3,481 -- 3,481
All other loans ................... 79 1,210 -- 1,289
------- ------ ------ -------
Total loans ..................... $12,876 $4,691 $4,908 $22,475
======= ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------------
Maturity Range
-------------------------------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Real estate construction loans .... $9,106 $ -- $ -- $ 9,106
Real estate mortgage loans ........ -- -- 3,626 3,626
Commercial and industrial loans ... -- 2,316 -- 2,316
All other loans ................... 79 986 -- 1,065
------ ------ ------ -------
Total loans ................. $9,185 $3,302 $3,626 $16,113
====== ====== ====== =======
</TABLE>
LOAN POLICY
All lending activities of Cornerstone are under the direct supervision
and control of the senior loan committee, which consists of the chief executive
officer, president, executive vice president and four other directors. The loan
committee enforces loan authorizations for each officer, decides on loans
exceeding such limits, services all requests for officer credits to the extent
allowable under current laws and regulations, administers all problem credits,
and determines the allocation of funds for each lending division. Cornerstone's
established maximum loan volume to deposits is 85%. The loan portfolio consists
primarily of real estate, commercial and installment loans. Commercial loans
consist of either real estate loans or term loans. Maturity of term loans is
normally limited to five to seven years. Conventional real estate loans may be
made up to 95% of the appraised value or purchase cost of the real estate for
no more than a thirty-year term. Installment loans are based on the earning
capacity and vocational stability of the borrower.
Management of Cornerstone periodically reviews the loan portfolio,
particularly nonaccrual and renegotiated loans. The review may result in a
determination that a loan should be placed on a nonaccrual status for income
recognition. In addition, to the extent that management identifies potential
losses in the loan portfolio, it reduces the book value of such loans, through
charge-offs, to their estimated collectible value. Cornerstone's policy is to
classify as nonaccrual any loan on which payment of principal or interest is 90
days or more past due except where there is adequate collateral to cover
principal and accrued interest and the loan is in the process of collection. No
concessions are granted and late fees are collected. In addition, a loan will
be classified as nonaccrual if, in the opinion of the management, based upon a
review of the borrower's or guarantor's financial condition, collateral value
or other factors, payment is questionable, even though payments are not 90 days
or more past due.
When a loan is classified as nonaccrual, any unpaid interest is
reversed against current income. Interest is included in income thereafter only
to the extent received in cash. The loan remains in a nonaccrual classification
until such time as the loan is brought current, when it may be returned to
accrual classification. When principal or interest on a nonaccrual loan is
brought current, if in management's opinion future payments are questionable,
the loan would remain classified as nonaccrual. After a nonaccrual or
renegotiated loan is charged off, any subsequent payments of either interest or
principal are applied first to any remaining balance outstanding, then to
recoveries and lastly to income.
The large number of consumer installment loans and the relatively
small dollar amount of each makes an individual review impracticable. It is
Cornerstone's policy to charge off any consumer installment loan which is past
due 90 days or more.
In addition, mortgage loans secured by real estate are placed on
nonaccrual status when the mortgagor is in bankruptcy, or foreclosure
proceedings are instituted. Any accrued interest receivable remains in interest
income as an obligation of the borrower.
- 62-
<PAGE> 76
Cornerstone's underwriting guidelines are applied to three major
categories of loans, commercial and industrial, real estate, which includes
residential, construction and development and certain other real estate loans
and consumer loans. Cornerstone requires its loan officers and loan committee
to consider the borrower's character, the borrower's financial condition as
reflected in current financial statements, the borrower's management
capability, the borrower's industry and the economic environment in which the
loan will be repaid. Before approving a loan, the loan officer or committee
must determine that the borrower is basically honest and creditworthy,
determine that the borrower is a capable manager, understand the specific
purpose of the loan, understand the source and plan of repayment, determine
that the purpose, plan and source of repayment as well as collateral are
acceptable, reasonable and practical given the normal framework within which
the borrower operates.
CREDIT RISK MANAGEMENT AND RESERVE FOR LOAN LOSSES
Credit risk and exposure to loss are inherent parts of the banking
business. Management seeks to manage and minimize these risks through its loan
and investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures
that it believes reflect the risk sensitive nature of Cornerstone. The loan
review procedures are set to monitor adherence to the established criteria and
to ensure that on a continuing basis such standards are enforced and
maintained.
Management's objective in establishing lending and investment
standards is to manage the risk of loss and provide for income generation
through pricing policies. To effectuate this policy, Cornerstone makes
commercial real estate and other loans with one year or less fixed maturity.
The loan portfolio is regularly reviewed and management determines the
amount of loans to be charged-off. In addition, such factors as Cornerstone's
previous loan loss experience, prevailing and anticipated economic conditions,
industry concentrations and the overall quality of the loan portfolio are
considered. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowances for losses on loans and real estate owned. Such agencies may
require Cornerstone to recognize additions to the allowances based on their
judgments about information available at the time of their examinations. In
addition, any loan or portion thereof which is classified as a "loss" by
regulatory examiners is charged-off.
The reserve for loan losses is increased by provisions charged to
operating expense. The reserve is reduced by charging off loans or portions of
loans at the time they are deemed by management to be uncollectible and
increased when loans previously charged off are recovered. The resulting
reserve for loan losses is viewed by management as a single, unallocated
reserve available for all loans and, in management's opinion, is adequate to
provide for reasonably foreseeable potential loan losses. Rules and formulas
relative to the adequacy of the reserve, although useful as guidelines to
management, are not rigidly applied. The reserve for loan losses was $201,000
at year end, or 1.25% of loans outstanding. The following table presents data
related to Cornerstone's reserve for loan losses for the three months ended
March 31, 1997 and the year ended December 31, 1996.
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(In thousands)
<S> <C> <C>
Beginning balance...................... $ 201 $ --
Provision for loan losses.............. 80 201
Net charge-offs........................ -- --
------ ------
Ending balance....................... $ 281 $ 201
====== ======
</TABLE>
As of March 31, 1997 and December 31, 1996, Cornerstone had no
nonperforming loans.
CAPITAL RESOURCES/LIQUIDITY
- 63 -
<PAGE> 77
Liquidity. Of primary importance to depositors, creditors and
regulators is the ability to have readily available funds sufficient to repay
fully maturing liabilities. Cornerstone's liquidity, represented by cash and
cash due from banks, is a result of its operating, investing and financing
activities. In order to insure funds are available at all times, Cornerstone
devotes resources to projecting on a monthly basis the amount of funds which
will be required and maintains relationships with a diversified customer base
so funds are accessible. Liquidity requirements can also be met through
short-term borrowings or the disposition of short-term assets which are
generally matched to correspond to the maturity of liabilities.
Although Cornerstone has no formal liquidity policy, in the opinion of
management, its liquidity levels are considered adequate. Cornerstone is not
subject to any specific regulatory liquidity requirements imposed by regulatory
orders. Cornerstone is subject to general FDIC guidelines which do not require
a minimum level of liquidity. Management believes its liquidity ratios meet or
exceed these guidelines. Management does not know of any trends or demands
which are reasonably likely to result in liquidity increasing or decreasing in
any material manner.
The following table sets forth liquidity ratios for the periods
indicated:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Average loans to average deposits....... 72.93% 87.11%
</TABLE>
Impact of Inflation and Changing Prices. The financial statements and
related financial data presented herein have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time and
due to inflation. The impact of inflation on operations of Cornerstone is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of Cornerstone are monetary in
nature. As a result, interest rates may have a more significant impact on
Cornerstone's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services.
CAPITAL ADEQUACY
Capital adequacy refers to the level of capital required to sustain
asset growth over time and to absorb losses. The objective of Cornerstone's
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures
used by management to monitor the results of these efforts are the ratios of
average equity to average assets, average tangible equity to average tangible
assets, and average equity to net loans.
The FDIC has adopted capital guidelines governing the activities of
banks. These guidelines require the maintenance of an amount of capital based
on risk-adjusted assets so that categories of assets with potentially higher
credit risk will require more capital backing than assets with lower risk. In
addition, banks are required to maintain capital to support, on a risk-adjusted
basis, certain off-balance sheet activities such as loan commitments.
The capital guidelines classify capital into two tiers, referred to as
Tier I and Tier II. Under risk-based capital requirements, total capital
consists of Tier I capital which is generally common shareholders' equity less
goodwill and Tier II capital which is primarily a portion of the allowance for
loan losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
- 64 -
<PAGE> 78
The framework for calculating risk-based capital requires banks to meet the
regulatory minimums of 4% Tier I and 8% total risk-based capital.
In 1990 regulators added a leverage computation to the capital
requirements, comparing Tier I capital to total average assets less goodwill.
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CAPITAL:
Tier I capital:
Stockholders' equity ........................................................ $ 5,398 $ 5,377
Less disallowed intangibles ................................................. -- --
Total Tier I capital ............................................... $ 5,398 $ 5,377
Tier II capital:
Qualifying debt ............................................................. $ -- $ --
Qualifying allowance for loan losses ........................................ $ 281 $ 201
Total Tier II capital .............................................. $ 281 $ 201
Total capital ...................................................... $ 5,679 $ 5,578
Risk-adjusted assets ................................................................. $25,438 $18,531
Quarterly average assets ............................................................. $33,102 $22,984
RATIOS:
Tier I capital to risk-adjusted assets ............................................... 21.22% 29.02%
Tier II capital to risk-adjusted assets .............................................. 27.32% 30.10%
Leverage-- Tier I capital to quarterly average assets less disallowed intangibles ... 16.31% 23.39%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") established five capital categories for banks. Under the regulations
defining these five capital categories, each bank is classified into one of the
five categories based on its level of risk-based capital as measured by Tier I
capital, total risk-based capital, and Tier I leverage ratios and its
supervisory ratings.
The following table lists the five categories of capital and each of
the minimum requirements for the three risk-based capital ratios.
<TABLE>
<CAPTION>
Total Risk-Based Tier I Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
---------------- ----------------- ------------
<S> <C> <C> <C>
Well-capitalized...................................... 10% or above 6% or above 5% or above
Adequately capitalized................................ 8% or above 4% or above 4% or above
Undercapitalized...................................... Less than 8% Less than 4% Less than 4%
Significantly undercapitalized........................ Less than 6% Less than 3% Less than 3%
Critically undercapitalized........................... -- -- 2% or less
</TABLE>
On March 31, 1997, Cornerstone exceeded the regulatory minimums and
qualified as a well-capitalized institution under the regulations.
- 65 -
<PAGE> 79
BUSINESS OF CORNERSTONE
GENERAL
Cornerstone, a Tennessee banking corporation, commenced operations on
January 23, 1996. Cornerstone provides a variety of banking and financial
services to businesses and individuals. Cornerstone's headquarters and
principal banking office is located at 5319 Highway 153, Chattanooga,
Tennessee. Cornerstone conducts its business as a commercial bank, with special
emphasis in retail banking, including the acceptance of checking and savings
deposits, and the making of commercial, real estate, personal, home
improvement, automobile and other installment and term loans. It also offers
collections, notary public services, escrow service and other customary bank
services to its customers.
EMPLOYEES
As of March 31, 1997, Cornerstone had approximately 14 full-time
employees. The employees are not represented by a collective bargaining unit.
Cornerstone believes its relationship with its employees to be good.
CUSTOMERS
It is the opinion of management that there is no single customer or
affiliated group of customers whose deposits, if withdrawn, would have a
materially adverse effect on the business of Cornerstone.
PROPERTIES
Cornerstone has its principal offices in its main office building at
5319 Highway 153, Chattanooga, Tennessee, which is owned and occupied by
Cornerstone.
LEGAL PROCEEDINGS
The nature of its business generates a certain amount of litigation
against Cornerstone involving matters arising in the ordinary course of
business. None of the legal proceedings currently pending or threatened to
which Cornerstone is a party or to which any of their properties are subject
will have, in the opinion of management of Cornerstone, a material effect on
the business or financial condition of Cornerstone.
COMPETITION
All phases of Cornerstone's banking activities are highly competitive.
Cornerstone competes actively with nine commercial banks, as well as finance
companies, credit unions and other financial institutions located in its
service area, which includes Hamilton County, Tennessee.
SUPERVISION AND REGULATION
Cornerstone is a member of the FDIC and is subject to examination and
regulation by that authority. Cornerstone is chartered under the banking laws
of the State of Tennessee and is subject to the supervision of, and regular
examination by, the TDFI.
The Tennessee Reciprocal Banking Act requires the filing of an
application with and the approval of the Tennessee Commissioner of Financial
Institutions to acquire a Tennessee bank or bank holding company.
- 66 -
<PAGE> 80
Tennessee law was amended in 1990 to permit branch banking in any
county in the state. Prior to the amendment, statewide branching was possible
pursuant to a May 1988 federal court decision.
In December 1991, a major banking bill entitled the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted, which
substantially revises the bank regulatory and funding provisions of the Federal
Deposit Insurance Act and makes revisions to several other federal banking
statutes. Among other things, FDICIA requires the federal banking regulators to
take "prompt corrective action" in respect of depository institutions that do
not meet minimum capital requirements. Cornerstone has capital levels well
above the minimum requirements. In addition, an institution that is not well
capitalized is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market and also may not be able to "pass through" insurance coverage for
certain employee benefit accounts. FDICIA also requires the holding company of
any undercapitalized depository institution to guarantee, in part, certain
aspects of such depository institution's capital plan for such plan to be
acceptable. FDICIA contains numerous other provisions, including new
accounting, audit and reporting requirements, beginning in 1995 termination of
the "too big to fail" doctrine except in special cases, limitations on the
FDIC's payment of deposits at foreign branches, new regulatory standards in
such areas as asset quality, earnings and compensation and revised regulatory
standards for, among other things, powers of state banks, real estate lending
and capital adequacy. FDICIA also requires that a depository institution
provide 90 days prior notice of the closing of any branches. Complete
regulations have not yet been issued under FDICIA.
EFFECT OF GOVERNMENTAL POLICIES
Cornerstone is affected by the policies of regulatory authorities,
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national money supply. Among the instruments
of monetary policy used by the Federal Reserve are: purchases and sales of U.S.
Government securities in the marketplace; changes in the discount rate, which
is the rate any depository institution must pay to borrow from the Federal
Reserve; and changes in the reserve requirements of depository institutions.
These instruments are effective in influencing economic and monetary growth,
interest rate levels and inflation.
The monetary policies of the Federal Reserve System and other
governmental policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future. Because of changing conditions in the national economy and in the money
market, as well as the result of actions by monetary and fiscal authorities, it
is not possible to predict with certainty future changes in interest rates,
deposit levels, loan demand or the business and earnings of Cornerstone or
whether the changing economic conditions will have a positive or negative
effect on operations and earnings.
Bills are pending before the United States Congress and the Tennessee
General Assembly which could affect the business of Cornerstone, and there are
indications that other similar bills may be introduced in the future. It cannot
be predicted whether or in what form any of these proposals will be adopted or
the extent to which the business of Cornerstone may be affected thereby.
- 67 -
<PAGE> 81
MANAGEMENT OF CORNERSTONE
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information regarding directors,
all of whom are nominees for reelection at the Cornerstone Meeting and all of
whom have served as director since the inception of Cornerstone in January
1996, and the executive officers of Cornerstone.
<TABLE>
<CAPTION>
NAME AGE POSITIONS(1) PRINCIPAL OCCUPATIONS
FOR PREVIOUS 5 YEARS
<S> <C> <C> <C>
Ramesh V. Amin.................... 49 Director President, American
Plastics, Inc.
Randy Brooks...................... 44 Director President, R. K. Haskew
& Company, Inc.
B. Kenneth Driver................. 61 Director President and Chief
Operating Officer,
Fillauer, Inc.
Karl Fillauer..................... 49 Director Chairman, Fillauer, Inc.
Timothy L. Hobbs.................. 38 President, Director Banker
Carolyn C. Johnson................ 53 Executive Vice President, Banker
Director
James H. Large.................... 53 Director President, Key James Brick & Supply
Company, Inc.
Lawrence D. Levine................ 65 Director President, Financial Management Corp.
Russell W. Lloyd.................. 56 Director President, MPL Construction Co.,
Earl A. Marler, Jr................ 60 Chairman of the Board, Banker
Chief Executive Officer
Doyce G. Payne, M.D............... 46 Director Physician
Bill Pollard...................... 49 Director Consultant
Turner Smith...................... 56 Director President, Chief Executive
Services, Inc.
Billy O. Wiggins.................. 54 Director President, Checks, Inc.
Marsha Yessick.................... 49 Director Owner, Yessick's Design Center
</TABLE>
- --------------
(1) All positions with Cornerstone are since inception (January 23, 1996).
No director of Cornerstone is related to any other director, except
Messrs. Brooks and Fillauer who are brothers-in-law. No director of Cornerstone
is a director or executive officer of another bank holding company, bank,
savings and loan association, or credit union. The following is a brief
description of the business experience of the executive officers of Cornerstone:
EARL A. MARLER, JR., Chairman of the Board and Chief Executive
Officer, was employed by J.C. Bradford & Company as an investment broker from
1992 until 1995. From 1978 to 1992, Mr. Marler was executive vice president of
Inter Federal Savings Bank, Chattanooga, Tennessee. His duties consisted
primarily of administrative responsibilities with emphasis on strategic
planning and marketing. From 1954 to 1978, Mr. Marler was employed by First
Tennessee Bank National Association, Chattanooga, Tennessee, where he became
senior vice president
- 68 -
<PAGE> 82
primarily responsible for the retail operations. He received both a B.S. in
Business Administration and a Masters of Business Administration from the
University of Tennessee, Chattanooga in 1958 and 1963, respectively. He
completed the Stonier Graduate School of Banking, Rutgers, New Jersey and
received Graduate Certificates in investments and commercial banking from the
American Institute of Banking.
TIMOTHY L. HOBBS, President, was vice president of financial planning
of First Federal Bank, FSB/AmSouth Bank, Chattanooga, Tennessee from July 1992
to September 1993. From 1981 to June 1992 he was employed by Inter Federal
Savings Bank, Chattanooga, Tennessee, where he served as vice president,
treasurer and chief financial officer. Mr. Hobbs received a B.S. in Accounting
from the University of Tennessee, Chattanooga, in 1980.
CAROLYN C. JOHNSON, Executive Vice President, was branch manager of
the Dallas Bay office of AmSouth Bank of Tennessee from February 1993 to April
1995. She served as vice president and branch manager of First Federal Savings
and Loan, Chattanooga, Tennessee, Union Square branch, from April 1992 to
February 1993. Ms. Johnson was employed by Inter Federal Savings Bank from
January 1965 to April 1992.
TRANSACTIONS WITH MANAGEMENT
Cornerstone has and expects to have in the future banking and other
business transactions in the ordinary course of its banking business with
directors, officers, and 10% beneficial owners of Cornerstone and their
affiliates, including members of their families or corporations, partnerships,
or other organizations in which such officers or directors have a controlling
interest, on substantially the same terms (including price, or interest rates
and collateral) as those prevailing at the time for comparable transactions
with unrelated parties. Any such banking transactions will not involve more
than the normal risk of collectibility nor present other unfavorable features
to Cornerstone.
THE CORNERSTONE BOARD AND ITS COMMITTEES
Directors are elected annually and each director holds office until
his successor is elected and qualified. Committees of the Board and their
members include Nominating Committee (Messrs. Fillauer, Hobbs, Levine,
Marler and Payne), Directors' Loan Committee (Messrs. Amin, Brooks, Hobbs,
Large, Marler, Pollard and Ms. Johnson) Asset/Liability Committee (Messrs.
Driver, Fillauer, Hobbs, Marler, Payne and Wiggins) and Audit Committee
(Messrs. Levine, Lloyd, Payne, Smith and Ms. Yessick).
EXECUTIVE COMPENSATION
No executive officer of Cornerstone received cash compensation in
excess of $100,000 for the year ending December 31, 1996. The Summary
Compensation Table provides information for the years indicated about the Chief
Executive Officer ("CEO")
- 69 -
<PAGE> 83
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
----------------------------
(a) (b) (c) (d)
Name and Principal Position Year Salary ($) Bonus ($)
--------------------------- ---- ---------- ---------
<S> <C> <C> <C>
Earl A. Marler, Jr., CEO 1996 $65,000(1) $ 0
</TABLE>
- ------------------
(1) Annualized.
COMPENSATION OF DIRECTORS
During 1996, no director received any compensation for serving as a
member of the Cornerstone Board.
OWNERSHIP OF CORNERSTONE COMMON STOCK
As of July 25, 1997, Cornerstone's records indicated the following
number of shares were beneficially owned by (i) all persons who own
beneficially 5% or more of the Cornerstone Common Stock, (ii) each person who
is a director and nominee for director or a named executive officer of
Cornerstone and (iii) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Amount and Nature
Name of of Beneficial Ownership Percent
Beneficial Owner (Number of Shares)(1) of Class
---------------- --------------------- --------
<S> <C> <C>
(i) Ramesh V. Amin................................ 25,000 5.83%
Timothy L. Hobbs.............................. 20,050 5.01%
Carolyn C. Johnson............................ 20,050 5.01%
Earl A. Marler, Jr............................ 25,178 5.86%
(ii) Ramesh V. Amin................................ 25,000 5.83%
Randy Brooks.................................. 16,556 4.42%
B. Kenneth Driver............................. 15,186 4.20%
Karl Fillauer................................. 15,000 4.17%
Timothy L. Hobbs ............................. 20,050 5.01%
Carolyn C. Johnson ........................... 20,050 5.01%
James H. Large................................ 18,980 4.03%
Lawrence D. Levine............................ 7,500 2.92%
Russell W. Lloyd.............................. 15,000 3.36%
Earl A. Marler, Jr............................ 25,178 5.86%
Doyce G. Payne, M.D........................... 18,500 4.75%
Bill Pollard.................................. 12,500 3.75%
Turner Smith.................................. 10,000 3.33%
Billy O. Wiggins.............................. 14,500 3.28%
Marsha Yessick................................ 8,000 2.18%
(iii) Directors and executive officers as a group
(16 persons).................................. 242,000 41.01%
</TABLE>
(1) Excludes shares subject to options exercisable within 60 days after the
Record Date held by the following persons: Amin (10,000); Brooks (10,000);
Driver (10,000); Fillauer (10,000); Hobbs (10,000); Johnson (10,000);
Large (5,000); Levine (10,000); Lloyd (5,000); Marler (10,000);
Payne (10,000); Pollard (10,000); Smith (10,000); Wiggins (5,000); and
Yessick (5,000) and Directors and executive officers as a group (130,000).
Such shares are deemed to be outstanding for the purpose of computing the
percentage of outstanding shares owned by such person, but are not deemed to
be outstanding for the purpose of computing the percentage owned by any
other person.
- 70 -
<PAGE> 84
DESCRIPTION OF CORNERSTONE CAPITAL STOCK
Cornerstone is authorized by its charter (the "Charter") to issue a
maximum of 2,000,000 shares of common stock, $1.00 par value (the "Cornerstone
Common Stock") of which 590,130 were outstanding at July 25, 1997. The
Charter also authorizes the issuance of a maximum of 2,000,000 shares of
preferred stock (the"Preferred Stock"), of which no shares were outstanding at
March 31, 1997.
COMMON STOCK
The holders of Cornerstone Common Stock are entitled to one vote for
each share held of record on all matters submitted to a vote of shareholders.
Cumulative voting is not allowed. Holders of Cornerstone Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Cornerstone Board out of funds legally available therefore and, in the event of
liquidation, dissolution or winding up of Cornerstone, will be entitled to
share ratably in all assets remaining after payment of liabilities. Holders of
Cornerstone Common Stock have no preemptive rights. Holders of Cornerstone
Common Stock have no right to convert their Common Stock into any other
securities. All outstanding shares of Cornerstone are fully paid and
nonassessable. Cornerstone acts as the transfer agent and registrar for
Cornerstone Common Stock.
Holders of Cornerstone Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board from funds legally
available whether in cash or stock; provided, however, that the declaration and
payment of dividends by the Cornerstone Board shall be subject to the rules and
regulations of the TDFI and the FDIC governing the amount of dividends which
may be paid to shareholders, the manner in which dividends are paid, and the
methods, if any, by which capital stock and surplus may be retired and reduced.
See "Dividends."
PREFERRED STOCK
The Preferred Stock may be issued by vote of the Cornerstone Board
without shareholder approval, subject in all respects to approval by the TDFI
under the provisions of T.C.A. ss. 45-2-207. The Preferred Stock may be
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issued in one or more classes and series, with such designations, full or
limited voting rights (or without voting rights), redemption, conversion, or
sinking fund provisions, dividend rates or provisions, liquidation rights, and
other preferences and limitations as the Cornerstone Board may determine in the
exercise of its business judgment. The Preferred Stock may be issued by the
Cornerstone Board for a variety of reasons. Cornerstone has no present plans to
issue any of its Preferred Stock.
The Preferred Stock could be issued in public or private transactions
in one or more (isolated or series of) issues. The shares of any issue of
Preferred Stock could be issued with rights, including voting, dividend, and
liquidation features, superior to those of any issue or class of Common Stock,
including the shares of Common Stock subject to the Offering. The issuance of
shares of the Preferred Stock could serve to dilute the voting rights or
ownership percentage of holders of the shares (or any other shares of Common
Stock). The issuance of shares of the Preferred Stock might also serve to deter
or block any attempt to obtain control of Cornerstone, or to facilitate any
such attempt.
WARRANTS
As of July 25, 1997, Cornerstone has Warrants outstanding which are
exercisable for 590,130 shares of Cornerstone Common Stock. The Warrants may be
exercised in whole or in part for $12 per share if exercised by February 8,
1998 and for $15 per share if exercised by February 8, 2001. The Warrants may
not be separately traded but may be transferred with the Common Stock. In order
to exercise the Warrant, the holder must deliver a notice to Cornerstone of the
holder's intent to exercise the Warrant. The Warrant exercise price and the
number of shares which can be purchased on exercise thereof will be adjusted in
the event of stock dividends, stock splits, combinations or reclassifications
and certain other events that would cause a dilution of the Warrants. The
holders of Warrants are not entitled to any rights of holders of shares of
Common Stock.
CONTROL-SHARE ACQUISITION PROVISIONS
Cornerstone's Charter includes a control-share acquisition provision
where acquirers of control blocks of stock are required to obtain disinterested
shareholder approval or by the affirmative vote of 75% of the Cornerstone Board
in order to vote such shares. The Charter specifically provides that no person
shall make a control-share acquisition by directly or indirectly offering to
acquire, or acquiring the beneficial ownership of more than 10% of any class of
an equity security of Cornerstone. In the event a control-share acquisition is
made in violation of the Charter, all stock beneficially owned by any person in
excess of 10% shall be considered "excess stock" and shall not be counted as
stock entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matters submitted to the shareholders for
a vote.
Any person who proposes to make or has made a control-share
acquisition may at the person's election deliver an acquiring person statement
to Cornerstone at Cornerstone's principal office. The acquiring person
statement must set forth all of the following: (i) the identity of the
acquiring person and each other member of any group of which the person is a
part for purposes of determining control shares; (ii) a statement that the
acquiring person statement is given pursuant to Article 11 of the Charter;
(iii) the number of shares of Cornerstone owned, directly or indirectly, by the
acquiring person and each other member of the group; (iv) the range of voting
power under which the control-share acquisition falls or would, if consummated,
fall; (v) if the control-share acquisition has not taken place: (a) a
description in reasonable detail of the terms of the proposed control-share
acquisition; and (b) representations of the acquiring person, together with a
statement, in reasonable detail, of the facts upon which they are based, that
the proposed control-share acquisition, if consummated, will not be contrary to
law and that the acquiring person has the financial capacity to make the
proposed control-share acquisition.
If the acquiring person so requests at the time of delivery of an
acquiring person statement and gives an undertaking to pay Cornerstone's
expenses of an annual meeting, within 10 days thereafter, the directors of
Cornerstone or others authorized to call such a meeting under Cornerstone's
By-Laws shall call a special meeting of
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shareholders of Cornerstone for the purpose of considering the voting rights to
be accorded the shares acquired or to be acquired in the control-share
acquisition. Unless the acquiring person agrees in writing to another date, the
special meeting of shareholders shall be held within 50 days after receipt by
Cornerstone of the request. If the acquiring person so requests in writing at
the time of delivery of the acquiring person statement, the special meeting
must not be held sooner than 30 days after receipt by Cornerstone of the
acquiring person statement. If no request is made, the voting rights to be
accorded the shares acquired in the control-share acquisition shall be
presented to the next special or annual meeting of the shareholders.
If a special meeting is requested, notice of the special meeting of
shareholders shall be given as promptly as reasonably practicable by
Cornerstone to all shareholders of record as of the record date set for the
meeting, whether or not entitled to vote at the meeting. Notice of the special
or annual shareholder meeting at which the voting rights are to be considered
must include or be accompanied by both of the following: (a) a copy of the
acquiring person statement delivered to Cornerstone pursuant to Article 11 of
the Charter; (b) a statement by the Cornerstone Board, authorized by its
directors, of its position or recommendation, or that it is taking no position
or making no recommendation, with respect to the proposed control-share
acquisition.
Control shares acquired in a control-share acquisition have voting
rights as were accorded the shares before the control-share acquisition only to
the extent granted by resolution approved by a majority of the shares other
than the interested shares or by the affirmative vote of 75% of Cornerstone
Board excluding any director who is proposing to make a control share
acquisition or who is a member of a group making or proposing to make a control
share acquisition.
To be approved by the shareholders, the resolution must be approved
by: (a) each class or series entitled to vote separately on the proposal by a
majority of all the votes entitled to be cast by the class or series with the
holders of the outstanding shares of a class or series being entitled to vote
as a separate class; and (b) each class or series entitled to vote separately
on the proposal by a majority of all the votes entitled to be cast by that
group, excluding all interested shares.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Cornerstone's Charter and By-Laws provide that it may indemnify
directors and officers who are a party to any litigation or proceeding by
reason of the fact that he is or was a director or officer of Cornerstone. Such
indemnification may include reasonable expenses incurred in connection with the
action, suit or proceeding, civil or criminal, except as may be otherwise
limited by law, including attorneys fees and out-of-pocket costs. Such
indemnification will be in accordance with the provisions of the Tennessee
Banking Act and the Tennessee Business Corporation Act and applicable rules and
regulations of all governmental authorities (including but not limited to the
FDIC, the TDFI, and the Federal Reserve Board) as they may exist from time to
time.
Cornerstone will indemnify its officers, directors, employees and
agents to the maximum extent permitted by law. Judgments, fines and settlements
incurred by him in connection with any such suit or proceeding, if he acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interest of the corporation, and, in the case of a derivative action on
behalf of the corporation, that he not be adjudged to be liable for negligence
or misconduct, are covered by the indemnification.
SECURITIES LAW LIMITATIONS
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to directors,
officers and controlling persons of Cornerstone, Cornerstone has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
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EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS
East Ridge is a Tennessee corporation subject to the provisions of the
TBCA. Cornerstone is a Tennessee banking corporation subject to the provisions
of the TBA and to the extent provisions of the TBCA are not inconsistent with
those of the TBA, Cornerstone is also subject to the provisions of the TBCA.
After the Merger, shareholders of Cornerstone, whose rights are governed by
Cornerstone's current Charter and Bylaws and by theTBA and the TBCA, as
described above, will become shareholders of New Cornerstone whose rights will
then be governed by the Amended and Restated Charter and Amended and Restated
Bylaws of New Cornerstone and by the TBCA. After the Merger, the rights of
shareholders of East Ridge who become shareholders of New Cornerstone will be
governed by the Amended and Restated Charter and Amended and Restated Bylaws of
New Cornerstone. The following is a summary of the material differences in the
rights of shareholders of East Ridge and Cornerstone and is qualified in its
entirety by reference to the governing law and the current Charters and Bylaws
of each of East Ridge and Cornerstone and the proposed Amended and Restated
Charter ("Proposed Charter") and Amended and Restated Bylaws ("Proposed
Bylaws") of New Cornerstone. Copies of the proposed governing documents are
attached hereto as Appendix "D." Certain topics discussed below are also
subject to federal law and the regulations promulgated thereunder, including
those of the FDIC currently applicable to Cornerstone.
REMOVAL OF DIRECTORS
East Ridge's, Cornerstone's and the Proposed Bylaws provide that any
director is subject to removal by a majority of the directors for cause or by a
majority of the shareholders without cause.
CONFLICT-OF-INTEREST TRANSACTIONS
The TBCA generally permits transactions involving East Ridge and an
interested director of East Ridge if (i) the material facts are disclosed and a
majority of disinterested directors or a committee of the East Ridge Board
consents, (ii) the material facts are disclosed and a majority of disinterested
shares entitled to vote thereon consents or (iii) the transaction is fair to
East Ridge. The TBCA prohibits loans to directors by East Ridge unless approved
by a majority vote of disinterested shareholders or the East Ridge Board
determines that the loan benefits East Ridge and either approves the specific
loan or a general plan of loans by East Ridge.
The TBA has no specific provisions with regard to conflicts of
interests of directors; however the rules and regulations of the FDIC goven
such transactions for directors of insured depository institutions.
MEETINGS OF SHAREHOLDERS
East Ridge's Bylaws authorize the Chairman of the Board, one-third of
the members of the East Ridge Board or, shareholders owning at least 20% of the
outstanding common stock, to call a special meeting of shareholders for any
purpose. Such a call shall state the purpose or purposes of the proposed
meeting.
Cornerstone's Bylaws and the Proposed Bylaws authorize the President,
one-third of the members of the Board of Directors or, shareholders owning at
least 20% of the outstanding common stock, to call a special meeting of
shareholders for any purpose. Such a call shall state the purpose or purposes
of the proposed meeting.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
The TBA provides that the recommendation of the Cornerstone Board and
the approval of a majority of the outstanding shares of Cornerstone entitled to
vote thereon is required to effect a merger or consolidation or to sell, lease
or exchange substantially all of Cornerstone's assets.
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The TBCA provides that the approval of the East Ridge Board and of a
majority of the outstanding shares of East Ridge entitled to vote thereon would
also generally be required to approve a merger or to sell, lease, exchange or
otherwise dispose of substantially all of East Ridge's assets. In accordance
with the TBCA, submission by the East Ridge Board of any such action may be
conditioned on any basis, including without limitation, conditions regarding a
supermajority voting requirement or that no more than a certain number of
shares indicate that they will seek dissenters' rights.
With respect to a merger, no vote of the shareholders of East Ridge
would be required if East Ridge were the surviving corporation and (i) East
Ridge's Charter would remain unchanged after the merger, subject to certain
exceptions, (ii) each shareholder of East Ridge immediately before the merger
would hold an identical number of shares, with identical rights and
preferences, after the merger, (iii) the number of voting shares outstanding
immediately after the merger plus the number of voting shares issuable as a
result of the merger (either by conversion of securities issued pursuant to the
merger or the exercise of rights and warrants issued pursuant to the merger),
will not exceed by more than 20% the number of voting shares of the surviving
corporation outstanding immediately before the merger; and (iv) the number of
participating shares outstanding immediately after the merger, plus the number
of participating shares issuable as a result of the merger (either by
conversion of securities issued pursuant to the merger or the exercise of
rights and warrants issued pursuant to the merger), will not exceed by more
than 20% the total number of participating shares outstanding immediately
before the merger.
With respect to a sale, lease, exchange or other disposition of
substantially all the assets of East Ridge, no vote of the shareholders of East
Ridge would be required if such transfer were conducted in the regular course
of business or if such transfer were made to a wholly-owned subsidiary of East
Ridge.
For a discussion of the Control-Share Acquisition provisions of the
Proposed Charter, See "Description of Cornerstone Capital Stock."
ACTION BY WRITTEN CONSENT
The TBCA provides that action may be taken without a shareholder
meeting and vote if all shareholders entitled to vote on the action consent to
taking such action without a meeting. Action by written consent of the East
Ridge shareholders or the Cornerstone shareholders is impracticable, and action
by written consent of the shraeholders of New Cornerstone will be
impracticable, given the number of holders of East Ridge Common Stock and
Cornerstone Common Stock.
INSPECTION RIGHTS
The TBCA contains provisions granting shareholders the right to
inspect certain records of each corporation. East Ridge shareholders are
entitled to inspect and copy, during regular business hours at East Ridge's
principal office, the minutes of shareholder meetings, charter, bylaws, annual
reports, and certain other records of the corporation, provided the shareholder
gives the corporation written notice of his demand at least 5 business days
before the date on which he wishes to inspect and copy the records. In
addition, a shareholder who makes a demand in good faith, for a proper purpose,
and describes with reasonable particularity his purpose and the records he
desires to inspect, and if the records are directly connected with his purpose,
may also, upon 5 days' written notice, inspect and copy: (i) accounting records
of the corporation, (ii) the records of shareholders and excerpts from minutes
of any meeting of the board of directors, (iii) records of any action of a
committee of the board of directors while acting in place of the board of
directors on behalf of the corporation, (iv) minutes of any meeting of the
shareholders, and (v) records of action taken by the shareholders or board of
directors without a meeting.
The TBA has no such provisions.
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AMENDMENT OF CERTIFICATE OF INCORPORATION OR CHARTER AND BYLAWS
The Charter and Bylaws of East Ridge and the Charter and Bylaws of
Cornerstone and the Proposed Charter and the Proposed Bylaws may all be amended
by the affirmative vote of a majority of the outstanding shares entitled to
vote thereon.
VOLUNTARY DISSOLUTION
The TBCA provides that East Ridge may be dissolved if the East Ridge
Board proposes dissolution and a majority of the shares of East Ridge entitled
to vote thereon approves. In accordance with the TBCA, the East Ridge Board may
condition its submission of a proposal for dissolution on any basis, including
a greater shareholder vote requirement.
The TBA and the rules and regulations of the FDIC govern the
dissolution of Cornerstone.
INDEMNIFICATION
The TBCA provides in certain situations for mandatory and permissive
indemnification of directors and officers. The TBCA provides that statutory
indemnification is not to be deemed exclusive of any other rights to which a
director seeking indemnification may be entitled; provided, however, no
indemnification may be made if a final adjudication adverse to the director or
officer establishes his liability (1) for any breach of loyalty to the
corporation or its shareholders; (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; or (3) for
unlawful distributions.
The Bylaws of both East Ridge and Cornerstone and the Proposed Bylaws
provide for indemnification of directors and officers as allowed by the TBCA.
BUSINESS COMBINATION STATUTE
Tennessee's Business Combination Act provides that a party owning 10%
or more of stock in a "resident domestic corporation" (such party is called an
"interested shareholder") cannot engage in a business combination with the
resident domestic corporation unless the combination (i) takes place at least 5
years after the interested shareholder first acquired 10% or more of the
resident domestic corporation, and (ii) either (A) is approved by at least 2/3
of the non-interested voting shares of the resident domestic corporation or (B)
satisfies certain fairness conditions specified in the Business Combination
Act.
These provisions apply unless one of two events occurs. A business
combination with an entity can proceed without delay when approved by the
target corporation's board of directors before that entity becomes an
interested shareholder, or the resident corporation may enact a charter
amendment or bylaw to remove itself entirely from the Business Combination Act.
This charter amendment or bylaw must be approved by a majority of the
shareholders who have held shares for more than one year prior to the vote. It
may not take effect for at least 2 years after the vote. East Ridge has not
adopted a charter or bylaw amendment removing East Ridge from coverage under
the Business Combination Act.
The Business Combination Act further provides an exemption from
liability for officers and directors of resident domestic corporations who do
not approve proposed business combinations or charter amendments and bylaws
removing their corporations from the Business Combination Act's coverage as
long as the officers and directors act in "good faith belief" that the proposed
business combination would adversely affect their corporation's employees,
customers, suppliers, or the communities in which their corporation operates
and such factors are permitted to be considered by the board of directors under
the charter.
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For a discussion of the change of control provisions of the FDIC rules
and regulations with respect to Cornerstone and of the Federal Reserve Board
with respect to East Ridge, see "Business of Cornerstone" and "Business of East
Ridge," respectively.
CONTROL SHARE ACQUISITION ACT
The Tennessee Control Share Acquisition Act ("TCSAA") strips a
purchaser's shares of voting rights any time an acquisition of shares in a
covered Tennessee corporation brings the purchaser's voting power to 1/5, 1/3
or a majority of all voting power. The purchaser's voting rights can be
established only by a majority vote of the other shareholders. The purchaser
may demand a Annual Meeting of shareholders to conduct such a vote. The
purchaser can demand such a meeting before acquiring a control share only if it
holds at least 10% of outstanding shares and announces a good faith intention
to make the control share acquisition. A target corporation may or may not
redeem the purchaser's shares if the shares are not granted voting rights. The
TBA contains no similar provisions.
The Proposed Charter includes similar provisions to the TCSAA.
INVESTOR PROTECTION ACT
Tennessee's Investor Protection Act ("TIPA") applies to tender offers
directed at corporations (called "offeree companies") that have "substantial
assets" in Tennessee and that are either incorporated in or have a principal
office in Tennessee. The TIPA requires an offeror making a tender offer for an
offeree company to file with the Commissioner of Commerce and Insurance (the
"Commissioner") a registration statement. When the offeror intends to gain
control of the offeree company, the registration statement must indicate any
plans the offeror has for the offeree. The Commissioner may require additional
information material to the takeover offer and may call for hearings. The TIPA
does not apply to an offer that the offeree company's board of directors
recommends to shareholders.
In addition to requiring the offeror to file a registration statement
with the Commissioner, the TIPA requires the offeror and the offeree company to
deliver to the Commissioner all solicitation materials used in connection with
the tender offer. The TIPA prohibits "fraudulent, deceptive, or manipulative
acts or practices" by either side, and gives the Commissioner standing to apply
for equitable relief to the Chancery Court of Davidson County, Tennessee, or to
any other chancery court having jurisdiction whenever it appears to the
Commissioner that the offeror, the offeree company, or any of its respective
affiliates has engaged in or is about to engage in a violation of the TIPA.
Upon proper showing, the Chancery Court may grant injunctive relief. The TIPA
further provides civil and criminal penalties for violations.
The TBA contains no similar provisions with respect to investor
protection.
AUTHORIZED CORPORATION PROTECTION ACT
The Tennessee Authorized Corporation Protection Act ("TACPA") is the
vehicle through which the Tennessee statutes attempt to permit the Business
Combination Act and the TCSAA to govern foreign corporations. The TACPA
provides that an authorized corporation can adopt a bylaw or a charter
provision electing to be subject to the operative provisions of the Business
Combination Act and the TCSAA, which then become applicable "to the same extent
as such provisions apply to a resident domestic corporation." Authorized
corporations are those that are required to obtain a Certificate of Authority
from the Tennessee Secretary of State and that satisfy any 2 of certain tests
including having its principal place of business located in Tennessee; having a
significant subsidiary located in Tennessee; having a majority of such
corporation's fixed assets located in Tennessee; having more than 10% of the
beneficial owners of the voting stock or more than 10% of such corporation's
shares of voting stock beneficially owned by residents of Tennessee; employing
more than 250 individuals in Tennessee or having an annual payroll paid to
residents of Tennessee that is in excess of $5,000,000; producing goods and/or
services in Tennessee that result
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in annual gross receipts in excess of $10,000,000; or having physical assets
and/or deposits located within Tennessee that exceed $10,000,000 in value.
The United States Court of Appeals for the Sixth Circuit, however, has
held the TACPA unconstitutional as it applies to target corporations organized
under the laws of states other than Tennessee.
The TBA contains no similar provisions with respect to authorized
corporation protection.
GREENMAIL ACT
The Tennessee Greenmail Act ("TGA") applies to any corporation
chartered under the laws of Tennessee which has a class of voting stock
registered or traded on a national securities exchange or registered with the
SEC pursuant to Section 12(g) of the Exchange Act. The TGA provides that it is
unlawful for any corporation or subsidiary to purchase, either directly or
indirectly, any of its shares at a price above the market value, as defined in
the TGA, from any person who holds more than 3% of the class of the securities
purchased if such person has held such shares for less than 2 years, unless
either the purchase is first approved by the affirmative vote of a majority of
the outstanding shares of each class of voting stock issued or the corporation
makes an offer of at least equal value per share to all holders of shares of
such class.
The TBA contains no similar provisions with respect to greenmail.
DIVIDENDS AND OTHER DISTRIBUTIONS
Neither East Ridge nor Cornerstone has ever paid any dividends on its
common stock.
The TBA generally allows dividends to be paid out of surplus of
Cornerstone or out of the net profits of Cornerstone for the current fiscal
year and/or the prior fiscal year. Cornerstone is probhibited by the TDFI from
paying dividends for a period of three years from the date Cornerstone began
its operations. See "Information Concerning Cornerstone -- Supervision and
Regulation."
The TBCA provides that East Ridge generally may make dividends or
other distributions to its shareholders unless after the distribution either
(i) East Ridge would not be able to pay its debts as they become due in the
usual course of business or (ii) East Ridge's assets would be less than the sum
of its liabilities plus the amount that would be needed to satisfy the
preferential dissolution rights of its preferred stock. There are no shares of
East Ridge preferred stock authorized.
DISSENTERS' RIGHTS
For a discussion of dissenters' rights under the TBA and the TBCA, see
"The Merger -- Dissenters' Rights" and Appendix C.
VALIDITY OF COMMON STOCK
A legal opinion to the effect that the shares of New Cornerstone
Common Stock when issued in accordance with the Merger Agreement, will be
validly issued, fully paid and nonassessable, has been rendered by Baker,
Donelson, Bearman & Caldwell, a Professional Corporation, Memphis, Tennessee,
counsel to Cornerstone.
EXPERTS
The consolidated financial statements of East Ridge and its subsidiary
included herein have been so included in reliance on the report of Joseph
Decosimo and Company, LLP, independent certified public accountants, given on
the authority of said firm as experts in auditing and accounting.
Representatives of Joseph Decosimo and Company,
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LLP, are expected to be present at the East Ridge Meeting, will have an
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.
The financial statements of Cornerstone included herein have been so
included in reliance on the report of Hazlett, Lewis & Bieter, PLLC,
independent certified public accountants, given on the authority of said firm
as experts in auditing and accounting. Representatives of Hazlett, Lewis &
Bieter, PLLC, are expected to be present at the Cornerstone Meeting, will have
an opportunity to make a statement if they desire to do so and are expected to
be available to respond to appropriate questions.
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INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Pro Forma Financial Information Page
----
<S> <C>
East Ridge Pro Forma Combined Condensed Balance Sheets as of March 31, 1997 ...........................F-3
East Ridge Pro Forma Combined Condensed Statements of Income for the three months ended
March 31, 1997 ........................................................................................F-4
East Ridge Pro Forma Combined Condensed Balance Sheets as of December 31, 1996 ........................F-5
East Ridge Pro Forma Combined Condensed Statements of Income for the year ended December
31, 1996 ..............................................................................................F-6
FINANCIAL STATEMENTS OF EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheet at March 31, 1997 (unaudited) ..............................................F-7
Consolidated Statements of Income for the three months ended March 31, 1997
and 1996 (unaudited) ..................................................................................F-8
Consolidated Statement of Stockholders' Equity for the three months ended
March 31, 1997 (unaudited) ............................................................................F-9
Consolidated Statements of Cash Flows for the three months ended March 31, 1997
and 1996 (unaudited) .................................................................................F-10
Report of Independent Accountants ....................................................................F-11
Consolidated Balance Sheets at December 31, 1996 and 1995 ............................................F-12
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994................F-13
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994......................................................................F-14
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994......................................................................F-15
Notes to Consolidated Financial Statements ...........................................................F-17
FINANCIAL STATEMENTS OF CORNERSTONE COMMUNITY BANK
Balance Sheet at March 31, 1997 (unaudited) ..........................................................F-35
Statement of Operations for the three months ended March 31, 1997 (unaudited) ........................F-36
Statement of Cash Flows for the three months ended March 31, 1997 (unaudited) ........................F-37
Notes to Financial Statements (Unaudited) ............................................................F-38
Report of Independent Certified Public Accountants ...................................................F-39
Balance Sheet at December 31, 1996....................................................................F-40
Statement of Operations From Inception (January 23, 1996) Through December 31, 1996 ..................F-41
Statement of Changes in Stockholders' Equity From Inception (January 23, 1996)
Through December 31, 1996 ............................................................................F-42
Statement of Cash Flows From Inception (January 23, 1996) Through December 31, 1996...................F-43
Notes to Financial Statements.........................................................................F-44
</TABLE>
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PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet
reflects (a) the combined condensed balance sheets of East Ridge and
Cornerstone as of March 31, 1997 and December 31, 1996 and (b) the pro forma
combined condensed statements of income as of March 31, 1997 and December 31,
1996 giving effect to the transaction as a "reverse acquisition" where the
acquirer is deemed to be Cornerstone in view of the 79.4% ownership interest
of the Cornerstone shareholders in New Cornerstone after the Merger. The
combined financial statements reflect the combined financial position as if the
combination had been consummated as of the end of the period for which a
balance sheet is presented and the combined results of operations as if the
combination had been consummated at the beginning of the fiscal year presented,
after giving effect to certain pro forma adjustments described in the
accompanying notes. All adjustments necessary to arrive at a fair statement of
the financial condition of East Ridge and Cornerstone at March 31, 1997 and
December 31, 1996, in the opinion of the managements of the respective
companies, have been included and are of a normal recurring nature. This
unaudited pro forma data should be read in conjunction with the consolidated
historical financial statements of East Ridge and Cornerstone, including the
respective notes thereto, which are included herein. See "Summary -- Equivalent
and Pro Forma Share Data" and "-- Selected Financial Data and Ratios." The pro
forma data set forth in the following pro forma combined condensed balance
sheet does not reflect, due to immateriality, certain accruals, reserves and
one-time costs that may be required to be made by Cornerstone pursuant to the
Merger Agreement which are described under "Summary -- Equivalent and Pro Forma
Share Data."
F-2
<PAGE> 95
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1997
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<CAPTION>
Pro forma
Cornerstone East Ridge Adjustments(g) Pro forma
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 730 $ 2,479 $ $ 3,209
Interest-bearing deposits 1,207 1,207
Securities available for sale 1,869 7,428 9,297
Securities held to maturity 7,050 5,362 12,412
Federal funds sold 1,850 2,600 (4,288)a, h 162
Loans, net 22,194 24,705 46,899
Premises, net 941 823 500 b 2,264
Accrued interest receivable 217 288 505
Goodwill 2,794 c 2,794
Other assets 271 848 -- 1,119
-------- -------- ------- --------
Total $ 36,329 $ 44,533 $ (994) $ 79,868
======== ======== ======= ========
Liabilities and stockholders' equity:
Deposits $ 30,814 $ 40,684 $ $ 71,498
Federal funds purchased
Other borrowed funds 364 364
Other liabilities 147 402 252 801
-------- -------- ------- --------
Total liabilities 30,961 41,450 252 72,663
-------- -------- ------- --------
Redeemable common stock 1,162 d 1,162
-------- -------- ------- --------
Stockholders' equity:
Common stock 590 1,090 (97)d 646
153 e
(1,090)f
Surplus 5,311 10 (1,065)d 5,930
1,684 e
(10)f
Retained earnings (503) 2,014 (2,014)f, h (503)
Unrealized appreciation (loss on
securities available-for-sale (30) (31) 31 f (30)
-------- -------- ------- --------
Total stockholders' equity 5,368 3,083 (2,408) 6,043
-------- -------- ------- --------
Total liabilities and stockholders' equity $ 36,329 $ 44,533 $ (994) $ 79,868
======== ======== ======= ========
</TABLE>
- -------
a. Cash paid to East Ridge shareholders representing 70%, or $4,287,500, of
the purchase price.
b. Estimated mark-to-market adjustment for East Ridge branch office, based on
assessed value.
c. Goodwill related to the transaction is estimated to be $2,794,000 and
is to be amortized straight-line over 15 years.
d. Redeemable equity held by David E. Young represents 96,857 shares
redeemable at $12.00 per share on the date of closing, $12.55 per share
in 1998 (46,745 shares), $14.00 per share in 1999 (28,356 shares) and $16.00
per share in 2000 (21,756 shares).
e. Represents 30%, or $1,837,500, of the purchase price which will be paid in
the form of New Cornerstone Common Stock resulting in the issuance of 153,
125 newly issued shares.
f. Adjustments to eliminate capital of East Ridge.
g. Allocation of purchase price:
<TABLE>
<S> <C>
[Equity in carrying value of net assets of East Ridge $ 3,083
Adjustments to state at fair market value:
Write-up fixed assets 500
Acquisition accruals:
Severance pay 0
Legal, accounting, and professional fees (100)
Tax effect of purchase adjustments (152)
Goodwill 2,794
---------
Adjusted equity in carrying value of assets $ 6,125
Allocated as follows:
Cash of $56.1772 per share paid to East Ridge
shareholders up to a maximum of $4,287,500 $ 4,288
Par value of an estimated 153,125 shares issued for
30% of outstanding East Ridge Common Stock 153
Estimated amount in excess of par value of 153,125
shares of New Cornerstone Common Stock issued at
$12.00 per share, $1.00 par value per share 1,684
---------
Total purchase price $ 6,125
</TABLE>
h. Not included is the effect on federal funds sold and retained earnings
resulting from possible severance cost of up to $300,000 in the aggregate
under the contractual obligations of New Cornerstone to Messrs. Renegar,
James R. Young and Crye.
F-3
<PAGE> 96
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)(UNAUDITED)
<TABLE>
<CAPTION>
Pro forma
Cornerstone East Ridge Adjustments Pro forma
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 496 $ 636 $1,132
Interest and dividends on securities 130 177 307
Other interest income 45 50 (54)a 41
------- ------ ------- ------
Total interest income 671 863 (54) 1,480
------- ------ ------- ------
Interest expense:
Interest on deposits 348 395 743
Interest on other borrowed funds 5 5
------- ------ ------- ------
Total interest expense 348 400 748
------- ------ ------- ------
Net interest income 323 463 (54) 732
Provision for loan losses 80 12 92
------- ------ ------- ------
Net interest income after provision 243 451 (54) 640
------- ------ ------- ------
Non-interest income 24 101 125
------- ------ ------
Non-interest expense 261 397 51 b 709
------- ------ ------- ------
Income before income taxes 6 155 (105) 56
Income taxes (5) 44 (40) (1)
------- ------ ------- ------
Net income $ 11 $ 111 $ (65) $ 57
======= ====== ======= ======
Average shares outstanding:
Pro forma, reported 590 109 (53) 646
======= ====== ======= ======
Earnings per share:
Pro forma $ 0.09
======
</TABLE>
- ----------
a. Earnings foregone from proceeds used to pay on cash distribution to East
Ridge shareholders representing 70%, or $4,287,500, of the purchase price
at an average rate of 5.00%. Not included is the effect on interest
income resulting from possible severance cost of up to $300,000 in the
aggregate under the contractual obligations of New Cornerstone to Messrs.
Renegar, James R. Young and Crye.
b.
<TABLE>
<S> <C>
Estimated increases in non-interest expense:
Amortization of goodwill (15 year period) $ 47
Amortization of write-up on fixed assets 4
----
Total 51
</TABLE>
F-4
<PAGE> 97
PRO FORMA COMBINED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1996
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
Pro forma
Cornerstone East Ridge Adjustments(g) Pro forma
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks ........................... $ 1,306 $ 2,361 $ $ 3,667
Interest-bearing deposits ......................... 1,206 1,206
Securities available for sale ..................... 1,925 5,299 7,224
Securities held to maturity ....................... 4,279 5,475 9,754
Federal funds sold ................................ 2,300 4,315 (4,288)(a),(h) 2,327
Loans, net ........................................ 15,912 24,978 40,890
Premises, net ..................................... 949 848 500 (b) 2,297
Accrued interest receivable ....................... 167 286 453
Goodwill(1)........................................ 2,830 (c) 2,588
Other assets ...................................... 254 804 0 1,058
-------- ------- ------- --------
Total .................................... $ 28,298 $44,366 $ (958) $ 71,706
======== ======= ======= ========
Liabilities and stockholders' equity:
Deposits .......................................... $ 22,779 $40,562 $ $ 63,341
Federal funds purchased
Other borrowed funds .............................. 364 364 364
Other liabilities ................................. 142 393 252 787
-------- ------- ------- --------
Total liabilities ........................ 22,921 41,319 252 64,492
-------- ------- ------- --------
Redeemable common stock............................ 1,162 (d) 1,162
-------- ------- ------- --------
Stockholders' equity:
Common stock .................................... 590 1,100 (97)(d) 646
153 e
(1,100) f
Surplus ......................................... 5,311 35 (1,065)(d) 5,930
1,684 e
(35)(f)
Retained earnings ............................... (514) 1,903 (1,903)(f),(h) (514)
Unrealized appreciation (loss) on securities..... s
available-for-sale............................. (10) 9 (9) (10)
-------- ------- ------- --------
Total stockholders' equity ............... 5,377 3,047 (2,372) 6,052
-------- ------- ------- --------
Total liabilities and stockholders'
equity ............................. $ 28,298 $44,366 $ (958) $ 71,706
======== ======= ======= ========
</TABLE>
- --------------------
(a) Cash paid to East Ridge shareholders representing 70%, or $4,287,500, of
the purchase price.
(b) Estimated mark-to-market adjustment for East Ridge Branch office; based on
assessed value.
(c) Goodwill related to the transaction is estimated to be $2,830,000 and is to
be amortized straight-line over 15 years.
(d) Redeemable equity held by David E. Young represents 96,857 shares
redeemable at $12.00 per share on the date of closing, $12.55 per
share in 1998 (46,745 shares), $14.00 per share in 1999 (28,356 shares)
and $16.00 per share in 2000 (21,756 shares).
(e) Represents 30%, or $1,837,500, of the purchase price which will be paid in
the form of New Cornerstone Common Stock resulting in the issuance of
153,125 newly issued shares.
(f) Adjustment to eliminate capital of East Ridge.
(g) Allocation of purchase price:
<TABLE>
<S> <C>
[Equity in carrying value of net assets of East Ridge $ 3,047
Adustments to state at fair market value:
Write-up fixed assets 500
Acquisitoin accruals
Severance pay 0
Legal, accounting and professional fees (100)
Tax effect of purchase adjustments (152)
Goodwill 2,830
-----------
Adjusted equity in carrying value of assets $ 6,125
Allocated as follows:
Cash of $56,1772 per share paid to East Ridge
shareholders up to a maximum of $4,287,500 $ 4,288
Par value of an estimated 153,125 shares issued for
30% of outstanding East Ridge Common Stock 153
Estimated amount in excess of par value of 153,125
shares of New Cornerstone Common Stock issued at
$12.00 per share, $1.00 par value per share 1,684
-----------
Total purchase price $ 6,125
</TABLE>
h. Not included is the effect on federal funds sold and retained earnings
resulting from possible severance cost of up to $300,000 in the aggregate
under the contractual obligations of New Cornerstone to Messrs. Renegar,
James R. Young and Crye.
F-5
<PAGE> 98
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<TABLE>
<CAPTION>
Pro forma
Cornerstone East Ridge Adjustments Pro forma
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans .............. 969 $ 2,529 $ 3,498
Interest and dividends on securities .... 117 732 849
Other interest income ................... 145 67 (214)(a) (2)
-------- ------- ------- --------
Total interest income ................... 1,231 3,328 (214)(a) 4,345
-------- ------- ------- --------
Interest expense:
Interest on deposits .................... 449 1,509 1,958
Interest on other borrowed funds ........ 32 32
-------- ------- --------
Total interest expense .................. 449 1,541 1,990
-------- ------- --------
Net interest income ..................... 782 1,787 (214) 2,355
Provision for loan losses ............... 201 36 237
-------- ------- ------- --------
Net interest income after provision ..... 581 1,751 (214) 2,118
-------- ------- --------
Non-interest income ..................... 38 458 496
-------- ------- --------
Non-interest expense .................... 1,264 1,521 (171)(b) 2,614
-------- ------- ------- --------
Income before income taxes .............. (645) 688 (43) 0
Income taxes ............................ (131) 202 (131) (60)
-------- ------- ------- --------
Net income .............................. $ (514) $ 486 $ 88 $ 60
======== ======= ======= ========
Average shares outstanding:
Pro forma, reported ..................... 590 112 (56) 646
======== ======= ======= ========
Earnings per share:
Pro forma ............................... $ 0.09
========
</TABLE>
- ------------------
(a) Earnings foregone from proceeds used to pay cash distribution to East
Ridge shareholders representing 70%, or $4,287,500, of the purchase
price at an average rate of 5.00%. Not included is the effect on interest
income resulting from possible severance cost of up to $300,000 in the
aggregate under the contractual obligations of New Cornerstone to Messrs.
Renegar, James R. Young and Crye.
(b) Estimated net decrease in non-interest expense resulting from the Merger.
<TABLE>
<S> <C>
Increases in non-interest expense:
Amortization of goodwill (15 year period) $ 189
Amortization of write-up on fixed assets 17
--------
Total 206
Decreases in non-interest expense:
Cornerstone organization costs (377)
--------
Net decrease in non-interest expense $ (171)
</TABLE>
F-6
<PAGE> 99
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Cash and Due from Banks $ 2,479
Federal Funds Sold 2,600
--------
Total Cash and Cash Equivalents 5,079
Securities Available-for-Sale 7,428
Securities to be Held to Maturity 5,362
Loans - less allowance for loan losses 24,705
Bank Premises and Equipment, net 823
Interest Receivable 288
Other Assets 848
--------
TOTAL ASSETS $ 44,533
========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits -
Demand $ 4,664
Interest-Bearing Demand 9,021
Savings 6,588
Certificates of Deposit of $100 or More 4,438
Certificates of Deposit Under $100 15,973
--------
Total Deposits 40,684
Other Liabilities 766
--------
Total Liabilities 41,450
--------
STOCKHOLDERS' EQUITY
Common Stock 1,090
Paid-In Surplus 10
Retained Earnings 2,014
Unrealized Appreciation (Depreciation) on
Securities Available-for-Sale, net of tax (31)
--------
Total Stockholders' Equity 3,083
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,533
========
</TABLE>
F-7
<PAGE> 100
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------ ----
<S> <C> <C>
INTEREST INCOME
Loans $ 636 $610
Investment Securities -
U.S. Treasury 30 33
U.S. Government Agencies 100 99
States and Political Subdivisions 42 41
Other 5 3
Income on Federal Funds Sold 50 12
----- ----
863 798
----- ----
INTEREST EXPENSE
Interest on Certificates of Deposit
of $100 or More 58 57
Interest on Other Deposits 337 330
Other 5 8
----- ----
400 395
----- ----
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 463 403
Provision for Loan Losses 12 12
----- ----
NET INTEREST INCOME 451 391
----- ----
NONINTEREST INCOME
Service Charges on Deposit Accounts 79 79
Credit Life Commissions -- 2
Other 22 62
----- ----
101 143
----- ----
NONINTEREST EXPENSES
Salaries 199 198
Employee Benefits 39 35
Net Occupancy 22 20
Other 137 124
----- ----
397 377
----- ----
INCOME BEFORE PROVISION FOR
INCOME TAXES 155 157
Provision for Income Taxes 44 48
----- ----
NET INCOME $ 111 $109
===== ====
COMMON STOCK DATA
Weighted Average Number of
Common Shares Outstanding 109 112
===== ====
Net Income Per Share $1.02 $.97
===== ====
</TABLE>
F-8
<PAGE> 101
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
ON SECURITIES
COMMON STOCK PAID-IN RETAINED AVAILABLE-
SHARES AMOUNT SURPLUS EARNINGS FOR-SALE
------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE - December 31, 1996 110 $ 1,100 $ 35 $ 1,903 $ 10
Retirement of Common stock (1) (10) (25)
Net Changes in Unrealized
Appreciation on Securities
Available-for-Sale (41)
Net Income 111
--- ------- ------- ------- -------
BALANCE - March 31, 1997 109 $ 1,090 $ 10 $ 2,014 $ (31)
=== ======= ======= ======= =======
</TABLE>
F-9
<PAGE> 102
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 131 $ 202
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales, Calls and Maturities of
Available-for-Sale Securities 226 1,524
Purchase of Available-for-Sale Securities (2,416) (1,192)
Proceeds from Calls and Maturities of
Held-to-Maturity Securities 114 223
Purchase of Held-to-Maturity Securities -- (546)
Net (Increase) Decrease in Loans 261 (1,223)
Proceeds on Sale of Loan -- 795
------- -------
NET CASH USED BY INVESTING ACTIVITIES (1,815) (419)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits 122 1,830
Retirement of Common Stock (35) --
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 87 1,830
------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,597) 1,613
CASH AND CASH EQUIVALENTS - beginning of year 6,676 2,824
------- -------
CASH AND CASH EQUIVALENTS - end of year $ 5,079 $ 4,437
======= =======
</TABLE>
F-10
<PAGE> 103
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
East Ridge Bancshares, Inc. and Subsidiary
East Ridge, Tennessee
We have audited the accompanying consolidated balance sheets of East Ridge
Bancshares, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of East Ridge
Bancshares, Inc. and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying
consolidating information is presented for purposes of additional analysis and
is not a required part of the basic consolidated financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
The corporation changed its method of accounting for debt securities during
1994.
Chattanooga, Tennessee
February 10, 1997
F-11
<PAGE> 104
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 2,360,643 $ 2,249,472
Federal Funds Sold 4,315,000 575,000
----------- -----------
Total Cash and Cash Equivalents 6,675,643 2,824,472
Securities Available-for-Sale 5,299,037 7,014,683
Securities to be Held to Maturity 5,475,306 6,104,238
Loans - less allowance for loan losses of
$296,487 for 1996 and $306,997 for 1995 24,977,654 22,407,252
Bank Premises and Equipment, net 847,832 950,772
Interest Receivable 286,396 324,157
Other Assets 803,822 773,655
----------- -----------
TOTAL ASSETS $44,365,690 $40,399,229
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits -
Demand $ 4,983,065 $ 4,306,914
Interest-Bearing Demand 8,547,951 8,267,850
Savings 6,559,326 6,623,161
Certificates of Deposit of $100,000 or More 3,754,252 3,616,387
Certificates of Deposit Under $100,000 16,717,625 14,302,457
----------- -----------
Total Deposits 40,562,219 37,116,769
Other Liabilities 756,195 632,437
----------- -----------
Total Liabilities 41,318,414 37,749,206
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock - $10 par value - 150,000 shares
authorized; 110,020 shares issued for 1996 and
112,000 shares issued for 1995 1,100,200 1,120,000
Paid-In Surplus 34,500 84,000
Retained Earnings 1,903,145 1,416,767
Unrealized Appreciation (Depreciation) on
Securities Available-for-Sale, net of tax
of $5,781 for 1996 and $(17,931) in 1995 9,431 29,256
----------- -----------
Total Stockholders' Equity 3,047,276 2,650,023
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,365,690 $40,399,229
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE> 105
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME
Loans $2,529,196 $2,361,102 $2,033,287
Investment Securities -
U.S. Treasury 133,902 106,748 75,152
U.S. Government Agencies 425,586 397,268 337,239
States and Political Subdivisions 155,187 71,563 4,551
Other 17,104 -- --
Income on Federal Funds Sold 67,565 104,596 29,900
---------- ---------- ----------
3,328,540 3,041,277 2,480,129
---------- ---------- ----------
INTEREST EXPENSE
Interest on Certificates of Deposit
of $100,000 or More 214,004 202,325 78,099
Interest on Other Deposits 1,294,923 1,167,519 835,586
Other 31,929 31,689 22,811
---------- ---------- ----------
1,540,856 1,401,533 936,496
---------- ---------- ----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 1,787,684 1,639,744 1,543,633
Provision for Loan Losses 36,000 48,000 74,000
---------- ---------- ----------
NET INTEREST INCOME 1,751,684 1,591,744 1,469,633
---------- ---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 323,677 340,389 344,051
Credit Life Commissions 10,260 6,034 6,394
Other 124,404 95,450 148,621
---------- ---------- ----------
458,341 441,873 499,066
---------- ---------- ----------
NONINTEREST EXPENSES
Salaries 795,670 761,432 763,920
Employee Benefits 135,706 140,057 151,043
Net Occupancy 79,228 97,219 94,983
Other 510,943 542,042 607,083
---------- ---------- ----------
1,521,547 1,540,750 1,617,029
---------- ---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 688,478 492,867 351,670
Provision for Income Taxes 202,100 149,800 132,300
---------- ---------- ----------
NET INCOME $ 486,378 $ 343,067 $ 219,370
========== ========== ==========
COMMON STOCK DATA
Weighted Average Number of
Common Shares Outstanding 111,993 112,000 112,000
========== ========== ==========
Net Income Per Share $ 4.34 $ 3.06 $ 1.96
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE> 106
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
ON SECURITIES
COMMON STOCK PAID-IN RETAINED AVAILABLE-
SHARES AMOUNT SURPLUS EARNINGS FOR-SALE
<S> <C> <C> <C> <C> <C>
BALANCE - December 31, 1993 112,000 $ 1,120,000 $ 84,000 $ 854,330 $ -
Adjustment of Securities
to Market Value Upon
Adoption of Statement of
Financial Accounting
Standards No. 115 7,803
Net Changes in Unrealized
Appreciation on
Securities Available-
for-Sale ( 56,107)
Net Income 219,370
------- ----------- --------- ----------- ---------
BALANCE - December 31, 1994 112,000 1,120,000 84,000 1,073,700 ( 48,304)
Net Changes in Unrealized
Appreciation on Securities
Available-for-Sale 77,560
Net Income 343,067
------- ----------- --------- ----------- ---------
BALANCE - December 31, 1995 112,000 1,120,000 84,000 1,416,767 29,256
Retirement of Common Stock ( 1,980) ( 19,800) ( 49,500)
Net Changes in Unrealized
Appreciation on Securities
Available-for-Sale ( 19,825)
Net Income 486,378
------- ----------- --------- ----------- ---------
BALANCE - December 31, 1996 110,020 $ 1,100,200 $ 34,500 $ 1,903,145 $ 9,431
======= =========== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE> 107
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Interest Received $ 3,366,301 $ 2,964,086 $ 2,410,007
Noninterest Income Received 388,761 407,447 405,566
Interest Paid (1,479,462) (1,359,883) (908,268)
Cash Paid to Suppliers and Employees (1,429,366) (1,496,536) (1,451,387)
Income Taxes Paid (175,228) (251,363) (47,378)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 671,006 263,751 408,540
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales, Calls and Maturities of
Available-for-Sale Securities 3,083,912 1,152,294 1,682,997
Purchase of Available-for-Sale Securities (1,386,535) (4,551,189) (548,750)
Proceeds from Calls and Maturities
of Held-to-Maturity Securities 1,715,964 1,001,420 662,759
Purchase of Held-to-Maturity Securities (1,051,162) (3,012,886) (2,427,911)
Net Increase in Loans (3,356,102) (931,519) (3,307,799)
Acquisition of Premises and Equipment (6,194) (94,564) (93,892)
Proceeds on Sale of Loan 794,682 -- 855,737
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (205,435) (6,436,444) (3,176,859)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits 3,445,450 6,441,091 985,504
Principal Payments on Long-Term Debt -- -- (324,000)
Proceeds from Issuance of Long-Term Debt -- -- 355,000
Retirement of Common Stock (59,850) -- --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,385,600 6,441,091 1,016,504
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,851,171 268,398 (1,751,815)
CASH AND CASH EQUIVALENTS -
beginning of year 2,824,472 2,556,074 4,307,889
----------- ----------- -----------
CASH AND CASH EQUIVALENTS -
end of year $ 6,675,643 $ 2,824,472 $ 2,556,074
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE> 108
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net Income $ 486,378 $ 343,067 $ 219,370
Depreciation 109,134 113,087 102,580
Amortization and Accretion (49,487) (38,434) (6,122)
Provision for Loan Losses 36,000 48,000 74,000
Gain on Investments (89) -- --
Gain on Sale of Loan (44,982) -- (58,893)
Deferred Income Taxes (1,000) (14,600) (34,125)
Deferred Compensation 16,879 15,303 13,495
Net Increase in Cash Surrender Value
of Insurance Policies (24,509) (34,426) (34,607)
Changes in Operating Assets and
Liabilities -
Decrease (Increase) in -
Interest Receivable 37,761 (77,191) (70,122)
Other Assets 7,492 246 (3,321)
Increase (Decrease) in -
Interest Payable 61,394 41,650 28,228
Other Liabilities 8,123 (45,988) 58,969
Income Taxes Payable 27,912 (86,963) 119,088
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 671,006 $ 263,751 $ 408,540
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Unrealized Appreciation (Depreciation)
on Available-for-Sale Securities,
net of deferred taxes $ (19,825) $ 77,560 $ (48,304)
Issuance of Promissory Note Upon
Purchase and Retirement of Common
Stock $ 9,450 $ - $ -
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE> 109
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies and practices of East Ridge Bancshares,
Inc. and subsidiary conform with generally accepted accounting principles and
general practice within the banking industry.
Descriptions of significant policies and practices are as follows:
DESCRIPTION OF BUSINESS - The corporation is a one-bank holding company
primarily conducting business in Hamilton County in Tennessee and the
surrounding areas through its subsidiary, The Bank of East Ridge.
CASH AND DUE FROM BANKS - The company maintains at various financial
institutions cash accounts which may exceed federally insured amounts at times.
CASH AND CASH EQUIVALENTS - For purposes of cash flows, the corporation
considers Federal Funds Sold and other cash items to be cash equivalents.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the parent company and its wholly-owned subsidiary. All
intercompany accounts and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES - Investment securities that the corporation has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and are stated at cost adjusted for amortization of premiums
and accretion of discounts, which are recognized as adjustments to interest
income. Investment securities considered available-for-sale are adjusted for
unrealized holding gains and losses and recorded at fair value. The difference
in fair value and cost adjusted for amortization and accretion for securities
available-for-sale is shown as a separate component of stockholders' equity net
of income tax effects. Gains or losses on disposition are based on the net
proceeds and the adjusted carrying amount of the securities sold, using the
specific identification method.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established
through a provision for loan losses charged to expenses. Loans are charged
against the allowance for loan losses when management believes the collection
of principal is unlikely. The allowance is determined by management based on
loan loss experience and evaluation of potential loss in the current loan
portfolio.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost
less accumulated depreciation. Expenditures for repairs and maintenance are
charged to expense as incurred and additions and improvements that
significantly extend the lives of assets are capitalized. As assets are
retired or otherwise disposed of, cost and accumulated depreciation are removed
from the related accounts and any gain or loss is reflected in operations.
Depreciation is provided primarily using the straight-line method over the
estimated useful lives of the depreciable assets.
F-17
<PAGE> 110
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
INTEREST INCOME ON LOANS - Interest on loans is accrued and credited to income
based on the principal amount outstanding. The accrual of interest on loans is
discounted when, in the opinion of management, there is an indication that the
borrower may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed.
INCOME TAXES - The parent and its wholly-owned subsidiary file consolidated
federal income tax returns.
Income taxes are computed based on the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Deferred tax
assets and liabilities are recognized for the estimated future tax effects
attributed to temporary differences between book and tax bases of assets and
liabilities and for carryforward items. The measurement of current and
deferred tax assets and liabilities is based on enacted tax law. Deferred tax
assets are reduced, if necessary, by a valuation allowance for the amount of
tax benefits that may not be realized.
COMMON STOCK DATA - Earnings per share is computed by dividing the net income
for the period by the weighted average number of common and common equivalent
shares outstanding during the period.
ESTIMATES AND UNCERTAINTIES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to prior years'
financial statements to conform with the current year presentation.
INVESTMENT SECURITIES
During 1994, the bank adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
statement requires investment securities to be classified in three categories:
held-to-maturity, available-for-sale and trading. For securities to be
classified as held-to-maturity, the bank must demonstrate the positive intent
and ability to hold the securities to maturity. Trading securities, of which
the bank has none, are securities bought and held principally for the purpose
of selling them in the near future. Available-for-sale securities are those
securities not classified as held-to-maturity or trading.
The amortized cost and estimated market value of securities at December 31,
1996 and 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Included in U.S. Government Agencies and other securities are certain
collateralized mortgage obligations with an amortized cost of $144,048
available-for-sale and $159,213 held-to-maturity for 1996 and $727,708
available-for-sale and $313,624 held-to-maturity for 1995 and an estimated
market value of $144,487 available-for-sale and $154,337 held-to-maturity for
1996 and $721,696 available-for-sale and $305,394 held-to-maturity for 1995.
F-18
<PAGE> 111
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES - continued
<TABLE>
<CAPTION>
DECEMBER 31, 1996
GROSS GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
AVAILABLE-FOR-SALE
<S> <C> <C> <C> <C>
U.S. Treasury -
Maturing within one year $ 598,798 $ 3,640 $ -- $ 602,438
Maturing after one but
within five years 1,237,900 3,123 2,101 1,238,922
---------- ------- ---------- ----------
1,836,698 6,763 2,101 1,841,360
---------- ------- ---------- ----------
U.S. Government Agencies -
Maturing within one year 234,446 900 168 235,178
Maturing after one but within
five years 1,240,210 4,030 2,567 1,241,673
Maturing after five but within
ten years 200,000 -- 1,859 198,141
Maturing after ten years 555,782 4,204 3,450 556,536
---------- ------- ---------- ----------
2,230,438 9,134 8,044 2,231,528
---------- ------- ---------- ----------
States and Political Subdivisions -
Maturing after ten years 937,210 14,563 374 951,399
---------- ------- ---------- ----------
Other -
Maturing after ten years 279,479 -- 4,729 274,750
---------- ------- ---------- ----------
Total Investment Securities
Available-for-Sale $5,283,825 $30,460 $ 15,248 $5,299,037
========== ======= ========== ==========
HELD-TO-MATURITY
U.S. Government Agencies -
Maturing after one but within
five years $2,106,754 $ 177 $ 20,614 $2,086,317
Maturing after ten years 1,461,628 10,465 14,991 1,457,102
---------- ------- ---------- ----------
3,568,382 10,642 35,605 3,543,419
---------- ------- ---------- ----------
States and Political Subdivisions -
Maturing after five but within
ten years 145,834 -- 500 145,334
Maturing after ten years 1,761,090 37,782 5,746 1,793,126
---------- ------- ---------- ----------
1,906,924 37,782 6,246 1,938,460
---------- ------- ---------- ----------
Total Investment Securities
Held-to-Maturity $5,475,306 $48,424 $ 41,851 $5,481,879
========== ======= ========== ==========
</TABLE>
F-19
<PAGE> 112
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES - continued
<TABLE>
<CAPTION>
DECEMBER 31, 1995
GROSS GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
AVAILABLE-FOR-SALE
<S> <C> <C> <C> <C>
U.S. Treasury -
Maturing within one year $ 901,512 $ 663 $ 2,116 $ 900,059
Maturing after one but
within five years 1,491,877 19,243 -- 1,511,120
---------- ------- ---------- ----------
2,393,389 19,906 2,116 2,411,179
---------- ------- ---------- ----------
U.S. Government Agencies -
Maturing within one year 100,562 -- 790 99,772
Maturing after one but within
five years 1,915,485 10,444 758 1,925,171
Maturing after five but within
ten years 447,907 6,642 -- 454,549
Maturing after ten years 958,578 10,902 7,650 961,830
---------- ------- ---------- ----------
3,422,532 27,988 9,198 3,441,322
---------- ------- ---------- ----------
States and Political Subdivisions -
Maturing after ten years 872,260 12,722 -- 884,982
---------- ------- ---------- ----------
Other -
Maturing after ten years 279,315 -- 2,115 277,200
---------- ------- ---------- ----------
Total Investment Securities
Available-for-Sale $6,967,496 $60,616 $ 13,429 $7,014,683
========== ======= ========== ==========
HELD-TO-MATURITY
U.S. Government Agencies -
Maturing within one year $ 38,266 $ -- $ -- $ 38,266
Maturing after one but within
five years 1,644,391 -- 35,595 1,608,796
Maturing after five but within
ten years 1,594,653 9,447 876 1,603,224
Maturing after ten years 1,068,042 10,423 14,629 1,063,836
---------- ------- ---------- ----------
4,345,352 19,870 51,100 4,314,122
---------- ------- ---------- ----------
States and Political Subdivisions -
Maturing after ten years 1,758,886 42,758 6,108 1,795,536
---------- ------- ---------- ----------
Total Investment Securities
Held-to-Maturity $6,104,238 $62,628 $ 57,208 $6,109,658
========== ======= ========== ==========
</TABLE>
Securities pledged to secure various public deposits and other balances have an
amortized cost of $1,634,493 and a market value of $1,625,624 as of December
31, 1996, and an amortized cost of $2,464,422 and a market value of $2,453,867
as of December 31, 1995.
F-20
<PAGE> 113
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES - continued
Gross realized gains and gross realized losses on sales of available-for-sale
securities were $6,327 and $6,238, respectively, for 1996. No sales
transactions occurred during 1995 and 1994.
As permitted by the Financial Accounting Standards Board, the bank made a
one-time reclassification of certain securities prior to December 31, 1995.
Securities transferred from the held-to-maturity to the available-for-sale
classification had amortized costs of $1,383,392 and unrealized gains of
$12,171 as of the date of transfer.
LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Real Estate Loans $ 16,607,000 $ 14,782,000
Commercial and Industrial Loans 4,329,000 3,602,000
Consumer Installment Loans 4,338,141 4,330,249
------------ ------------
25,274,141 22,714,249
Allowance for Loan Losses (296,487) (306,997)
------------ ------------
Net Loans $ 24,977,654 $ 22,407,252
============ ============
</TABLE>
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Allowance for Loan Losses -
beginning of year $ 306,997 $ 284,714 $ 192,636
Provision for Loan Losses 36,000 48,000 74,000
Loans Charged Off (58,458) (33,765) (25,587)
Recoveries 11,948 8,048 43,665
--------- --------- ---------
Allowance for Loan Losses - end of year $ 296,487 $ 306,997 $ 284,714
========= ========= =========
</TABLE>
Because of uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the related
allowance may change in the near term. However, the amount of the change that
is reasonably possible cannot be estimated.
F-21
<PAGE> 114
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land and Improvements $ 182,712 $ 182,712
Buildings 447,447 447,447
Furniture and Equipment 828,851 822,658
Automobiles 36,590 36,590
----------- -----------
1,495,600 1,489,407
Accumulated Depreciation (647,768) (538,635)
----------- -----------
$ 847,832 $ 950,772
=========== ===========
</TABLE>
OTHER LIABILITIES
On March 29, 1994, the corporation entered into a $1,000,000 revolving credit
agreement with a financial institution. The corporation may borrow up to the
maximum principal amount of this line and it is collateralized by all of the
outstanding stock of The Bank of East Ridge. Interest equal to the financial
institution's base commercial rate is payable annually. The line of credit
agreement expires April 1, 1997, but may be converted to a 10-year term note if
the corporation is in compliance with the terms of the agreement.
An outstanding balance of $355,000 is included in other liabilities as of
December 31, 1996 and 1995.
The loan agreement related to the revolving credit line contains various
restrictive covenants which include minimum capital and performance ratios of
the subsidiary, restrictions on fixed asset additions, other indebtedness and
dividend payments. The corporation was not in compliance with certain
covenants as of December 31, 1996; however, the financial institution has
waived its rights under the agreement arising from those violations.
The corporation entered into a promissory note on December 31, 1996, in the
amount of $9,450. Interest will be paid at a rate of 6% per annum with the
note due June 30, 1997.
RELATED PARTIES
Certain directors of the corporation and companies in which they were principal
owners were loan customers of the bank during 1996 and 1995. Such loans are
made in the ordinary course of business at normal credit terms, including
interest rate and collateralization. The total of such loans amounted to
$168,058 as of December 31, 1996, and $122,958 as of December 31, 1995. During
1996, $151,072 of these loans were made and repayments totaled $105,972.
F-22
<PAGE> 115
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current Provision $ 203,100 $ 164,400 $ 166,500
Deferred Provision (1,000) (14,600) (34,200)
--------- --------- ---------
$ 202,100 $ 149,800 $ 132,300
========= ========= =========
</TABLE>
Reconciliation of the provision for income taxes to statutory rates is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal Income Tax at Statutory Rate $ 236,900 $ 167,600 $ 116,800
Decreases Resulting From -
Tax Exempt Interest (45,900) (24,300) (1,700)
Life Insurance (9,300) (13,100) (13,200)
Other (4,600) (3,900) (2,500)
Increases Resulting From -
State Income Taxes, net of federal income tax benefit 24,300 17,200 10,800
Other 700 6,300 22,100
--------- --------- ---------
$ 202,100 $ 149,800 $ 132,300
========= ========= =========
</TABLE>
The following is a summary of the significant components of the corporation's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
DEFERRED TAX ASSETS
Loan Loss Reserve $102,743 $106,947
Other 16,570 13,195
-------- --------
119,313 120,142
-------- --------
DEFERRED TAX LIABILITIES
Property and Equipment 79,736 81,565
Securities Available-for-Sale 5,781 17,931
-------- --------
85,517 99,496
-------- --------
NET DEFERRED TAX ASSETS $ 33,796 $ 20,646
======== ========
</TABLE>
F-23
<PAGE> 116
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
401(k) PLAN
The bank's 401(k) Plan (the plan) covers employees meeting certain age and
service requirements. Participants of the plan may make elective contributions
up to the maximum percentage allowable through a salary reduction plan. The
bank may make matching contributions equal to a discretionary percentage, to be
determined by the bank, of the participants' salary reductions. Contributions
to the plan were $7,020 for 1996, $6,554 for 1995 and $6,817 for 1994.
DEFERRED COMPENSATION PLAN
The bank's salary continuation and survivor income plans cover certain officers
and directors. The plans were funded by single premium contributions. The
present value of future benefit payments is accrued annually. The following
summarizes this information:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current Value of Life Insurance Policies -
beginning of year $ 706,198 $ 671,772
Amortization of Surrender Charges (10,395) --
Mortality Cost (6,582) (6,106)
Policy Income 41,486 40,532
--------- ---------
Current Value of Life Insurance Policies -
end of year $ 730,707 $ 706,198
========= =========
Present Value of Future Benefit Payments $ 55,064 $ 38,185
========= =========
</TABLE>
OPERATING LEASE
The bank leases certain real estate under noncancelable operating leases. The
leases include an option to renew during 1997 for a five year term. Future
minimum lease payments under the leases as of December 31, 1996, are as
follows:
YEAR ENDING
December 31, 1997 $ 36,400
Rental expense totaled $46,444 for 1996, $67,037 for 1995 and $102,290 for
1994.
F-24
<PAGE> 117
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheet. The contract or
notional amounts of those instruments express the extent of involvement the
bank has in particular classes of financial instruments.
East Ridge Bancshares, Inc. and subsidiary's exposure to credit loss from
nonperformance by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
The bank generally requires collateral or other security to support financial
instruments with off-balance-sheet credit risk.
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
DECEMBER 31,
1996 1995
<S> <C> <C>
Financial Instruments Whose
Contracts Represent Credit Risk -
Commitments to Extend Credit $5,702,298 $6,578,245
Standby Letters of Credit 366,025 152,300
---------- ----------
$6,068,323 $6,730,545
========== ==========
</TABLE>
Commitments to extend credit are agreements to lend to customers. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of fees. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future liquidity requirements. The amount drawn on the total
commitments is $3,475,990 as of December 31, 1996, and $3,805,750 as of
December 31, 1995. The bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by
the bank on extension of credit is based on management's credit assessment of
the counterparty. Collateral held varies but may include certificates of
deposit, assignment of life insurance policies, automobiles and real estate.
The amount collateralized as of December 31, 1996, was 69% and as of December
31, 1995, was 60%.
Standby letters of credit are conditional commitments issued by the bank
guaranteeing performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The bank holds personal guarantees
as collateral supporting those commitments. The extent of collateral held for
those commitments varies.
F-25
<PAGE> 118
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT
RISK - continued
The bank's loan portfolio is diversified with regard to customers, industries
and types of collateral although most of the bank's business is in Hamilton
County and 66% of its 1996 loans and 65% of its 1995 loans are real estate
related. Occasionally, loans to a customer or to a group of related entities
may constitute a concentration of credit risk. As of December 31, 1996, three
such concentrations existed consisting of loans to three customers representing
17%, 17% and 16% of the bank's total capital. As of December 31, 1995, four
such concentrations existed consisting of loans to four customers representing
17%, 16%, 16% and 15% of the bank's total capital.
The bank's aggregate amount of cash value life insurance policies as a percent
of the bank's total capital was 22% as of December 31, 1996, and 24% as of
December 31, 1995.
SUPPLEMENTAL FINANCIAL DATA
Components of other noninterest income and noninterest expenses in excess of 1%
of income not disclosed elsewhere for the respective periods are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Noninterest Income -
Earnings on Cash Surrender Value
of Life Insurance Policies $41,486 $40,532 $40,277
Noninterest Expense -
Furniture and Equipment Repair $62,381 $54,780 $62,137
Printing Supplies $53,979 $62,011 $59,951
FDIC Insurance Premiums $ -- $36,101 $ 7,323
Telephone $ -- $31,480 $35,662
</TABLE>
REGULATORY MATTERS
The corporation and bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the corporation and bank must meet specific capital guidelines that involve
quantitative measures of the corporation and bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The corporation and bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
F-26
<PAGE> 119
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REGULATORY MATTERS - continued
Quantitative measures established by regulation to ensure capital adequacy
require the corporation and bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that the corporation and bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 1996, the most recent notifications from the Federal Deposit
Insurance Corporation categorized the bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the corporation and bank must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the corporation and bank's category.
The corporation's and bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
DECEMBER 31, 1996
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL
(TO RISK WEIGHTED ASSETS)
East Ridge Bancshares,
Inc. and Subsidiary $ 3,334,332 12.0% $ 2,230,000 >8.0% $ 2,787,500 >10.0%
- -
The Bank of East
Ridge $ 3,634,000 13.0% $ 2,230,240 >8.0% $ 2,787,800 >10.0%
- -
TIER I CAPITAL
(TO RISK WEIGHTED ASSETS)
East Ridge Bancshares,
Inc. and Subsidiary $ 3,037,845 10.9% $ 1,115,000 >4.0% $ 1,672,500 >6.0%
- -
The Bank of East
Ridge $ 3,337,236 12.0% $ 1,115,120 >4.0% $ 1,672,680 >6.0%
- -
TIER I CAPITAL
(TO AVERAGE ASSETS)
East Ridge Bancshares,
Inc. and Subsidiary $ 3,037,845 7.0% $ 1,727,600 >4.0% $ 2,159,500 >5.0%
- -
The Bank of East
Ridge $ 3,337,236 7.7% $ 1,727,720 >4.0% $ 2,159,650 >5.0%
- -
</TABLE>
F-27
<PAGE> 120
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REGULATORY MATTERS - continued
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
DECEMBER 31, 1995
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL
(TO RISK WEIGHTED ASSETS)
East Ridge Bancshares,
Inc. and Subsidiary $ 2,927,764 11.6% $ 2,026,270 >8.0% $ 2,532,838 >10.0%
- -
The Bank of East
Ridge $ 3,288,935 13.0% $ 2,026,510 >8.0% $ 2,533,138 >10.0%
- -
TIER I CAPITAL
(TO RISK WEIGHTED ASSETS)
East Ridge Bancshares,
Inc. and Subsidiary $ 2,620,767 10.3% $ 1,013,135 >4.0% $ 1,519,703 >6.0%
- -
The Bank of East
Ridge $ 2,981,938 11.8% $ 1,013,255 >4.0% $ 1,519,883 >6.0%
- -
TIER I CAPITAL
(TO AVERAGE ASSETS)
East Ridge Bancshares,
Inc. and Subsidiary $ 2,620,767 6.6% $ 1,577,280 >4.0% $ 1,971,600 >5.0%
- -
The Bank of East
Ridge $ 2,981,938 7.6% $ 1,577,400 >4.0% $ 1,971,750 >5.0%
- -
</TABLE>
COMMITMENTS
On November 8, 1996, the corporation and bank entered into an agreement with
officers and full-time employees of the bank to pay severance benefits if
officers and employees are involuntarily terminated within the two-year period
after the closing date of a change in control as defined in the agreement. The
maximum severance benefits payable could be approximately $299,000.
SUBSEQUENT EVENT
Subsequent to year end, The Bank of East Ridge entered into discussions to
merge with another bank. The surviving corporation will be The Bank of East
Ridge. At the closing, The Bank of East Ridge will amend and restate its
charter to change its name and change its authorized shares and par value.
F-28
<PAGE> 121
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial statements of East Ridge Bancshares, Inc. are summarized as
follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1996 1995
ASSETS
<S> <C> <C>
Cash $ 102,862 $ 7,687
Investment in Subsidiary 3,346,667 3,011,194
Receivable from Subsidiary 42,544 36,134
---------- ----------
TOTAL ASSETS $3,492,073 $3,055,015
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other Liabilities $ 444,797 $ 404,992
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock - $10 par value - 150,000 shares authorized;
110,020 shares issued 1,100,200 1,120,000
Paid-In Surplus 34,500 84,000
Retained Earnings 1,903,145 1,416,767
Unrealized Appreciation on Securities
Available-for-Sale 9,431 29,256
---------- ----------
Total Stockholders' Equity 3,047,276 2,650,023
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,492,073 $3,055,015
========== ==========
</TABLE>
F-29
<PAGE> 122
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED PARENT COMPANY FINANCIAL STATEMENTS - continued
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INCOME
Dividend $ 150,000 $ 15,000 $ 86,000
Other Income 329 1,972 562
----------- ----------- -----------
150,329 16,972 86,562
----------- ----------- -----------
EXPENSES
Interest 31,929 31,689 22,811
Other Expense 120 -- 556
----------- ----------- -----------
32,049 31,689 23,367
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX
BENEFIT AND EQUITY IN
UNDISTRIBUTED INCOME OF
SUBSIDIARY 118,280 (14,717) 63,195
Income Tax Benefit (12,800) (10,300) (10,500)
----------- ----------- -----------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARY 131,080 (4,417) 73,695
Equity in Undistributed Income of Subsidiary 355,298 347,484 145,675
----------- ----------- -----------
NET INCOME 486,378 343,067 219,370
RETAINED EARNINGS - beginning of year 1,416,767 1,073,700 854,330
----------- ----------- -----------
RETAINED EARNINGS - end of year $ 1,903,145 $ 1,416,767 $ 1,073,700
=========== =========== ===========
</TABLE>
F-30
<PAGE> 123
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED PARENT COMPANY FINANCIAL STATEMENTS - continued
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 486,378 $ 343,067 $ 219,370
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities -
Equity in Earnings of Subsidiary (505,298) (362,484) (231,675)
Dividends Received from Subsidiary 150,000 15,000 86,000
Changes in Operating Assets and Liabilities -
Decrease (Increase) in -
Receivable from Subsidiary (6,410) 89,151 (125,285)
Taxes Receivable -- -- 14,390
Increase (Decrease) in -
Payable to Subsidiary -- -- (5,386)
Interest Payable 511 3,424 5,599
Other Payables 1,932 103 548
Taxes Payable 27,912 (86,963) 104,698
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 155,025 1,298 68,259
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additional Capitalization of Subsidiary -- -- (100,000)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Debt -- -- (324,000)
Proceeds from Issuance of Long-Term Debt -- -- 355,000
Retirement of Common Stock (59,850) -- --
--------- --------- ---------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (59,850) -- 31,000
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH 95,175 1,298 (741)
CASH - beginning of year 7,687 6,389 7,130
--------- --------- ---------
CASH - end of year $ 102,862 $ 7,687 $ 6,389
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest Paid $ 31,418 $ 28,265 $ 17,212
Income Tax Received $ (34,302) $ (12,488) $ (1,606)
Changes in Unrealized Appreciation
(Depreciation) on Available-for-Sale
Securities, net of deferred taxes $ (19,825) $ 77,560 $ (48,304)
Issuance of Promissory Note Upon
Purchase and Retirement of Common Stock $ 9,450 $ -- $ --
</TABLE>
F-31
<PAGE> 124
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
THE BANK OF EAST RIDGE
EAST RIDGE BANCSHARES, INC. CONSOLIDATED
(i)
ASSETS
<S> <C> <C> <C>
Cash and Due from Banks $ 2,360,643 $ 102,862 $ 2,360,643
Federal Funds Sold 4,315,000 -- 4,315,000
----------- ---------- -----------
Total Cash and Cash Equivalents 6,675,643 102,862 6,675,643
Securities Available-for-Sale 5,299,037 -- 5,299,037
Securities to be Held to Maturity 5,475,306 -- 5,475,306
Loans - less allowance for
loan losses of $296,487 24,977,654 -- 24,977,654
Bank Premises and Equipment, net 847,832 -- 847,832
Interest Receivable 286,396 -- 286,396
Investment in Subsidiary -- 3,346,667 --
Other Assets 806,822 42,544 803,822
----------- ---------- -----------
TOTAL ASSETS $44,368,690 $3,492,073 $44,365,690
=========== ========== ===========
</TABLE>
(i) Certain items have been eliminated in consolidation.
F-32
<PAGE> 125
<TABLE>
<CAPTION>
THE BANK OF EAST RIDGE
EAST RIDGE BANCSHARES, INC. CONSOLIDATED
(i)
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
LIABILITIES
Deposits -
Demand $ 4,983,065 $ -- $ 4,983,065
Interest-Bearing Demand 8,650,813 -- 8,547,951
Savings 6,559,326 -- 6,559,326
Certificates of Deposit of
$100,000 or More 3,754,252 -- 3,754,252
Certificates of Deposit
Under $100,000 16,717,625 -- 16,717,625
----------- ---------- -----------
Total Deposits 40,665,081 -- 40,562,219
Other Liabilities 356,942 444,797 756,195
----------- ---------- -----------
Total Liabilities 41,022,023 444,797 41,318,414
----------- ---------- -----------
STOCKHOLDERS' EQUITY
Common Stock - $10 par value -
150,000 shares authorized;
110,020 shares issued -- 1,100,200 1,100,200
Common Stock - $40 par value -
20,000 shares authorized;
17,142 shares issued 685,680 -- --
Paid-In Surplus 1,114,320 34,500 34,500
Retained Earnings 1,537,236 1,903,145 1,903,145
Unrealized Appreciation on Securities
Available-for-Sale 9,431 9,431 9,431
----------- ---------- -----------
Total Stockholders' Equity 3,346,667 3,047,276 3,047,276
----------- ---------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $44,368,690 $3,492,073 $44,365,690
=========== ========== ===========
</TABLE>
F-33
<PAGE> 126
EAST RIDGE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATING SCHEDULE OF INCOME
Year Ended December 31, 1996
<TABLE>
<CAPTION>
THE BANK OF EAST RIDGE
EAST RIDGE BANCSHARES, INC. CONSOLIDATED
(i)
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 2,529,196 $ -- $ 2,529,196
Investment Securities -
U.S. Treasury 133,902 -- 133,902
U.S. Government Agencies 425,586 -- 425,586
States and Political Subdivisions 155,187 -- 155,187
Other 17,104 -- 17,104
Income on Federal Funds Sold 67,565 -- 67,565
Other -- 329 --
----------- ----------- -----------
3,328,540 329 3,328,540
----------- ----------- -----------
INTEREST EXPENSE
Interest on Certificates of Deposit
of $100,000 or More 214,004 -- 214,004
Interest on Other Deposits 1,295,252 -- 1,294,923
Other -- 31,929 31,929
----------- ----------- -----------
1,509,256 31,929 1,540,856
----------- ----------- -----------
NET INTEREST INCOME (EXPENSE)
BEFORE PROVISION FOR LOAN LOSSES 1,819,284 (31,600) 1,787,684
Provision for Loan Losses 36,000 -- 36,000
----------- ----------- -----------
NET INTEREST INCOME (LOSS) 1,783,284 (31,600) 1,751,684
----------- ----------- -----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 323,677 -- 323,677
Credit Life Commissions 10,260 -- 10,260
Dividend from Subsidiary -- 150,000 --
Equity in Earnings of Subsidiary -- 355,298 --
Other 124,404 -- 124,404
----------- ----------- -----------
458,341 505,298 458,341
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries 795,670 -- 795,670
Employee Benefits 135,706 -- 135,706
Net Occupancy 79,228 -- 79,228
Other 510,823 120 510,943
----------- ----------- -----------
1,521,427 120 1,521,547
----------- ----------- -----------
INCOME BEFORE INCOME TAX
PROVISION (BENEFIT) 720,198 473,578 688,478
Income Tax Provision (Benefit) 214,900 (12,800) 202,100
----------- ----------- -----------
NET INCOME $ 505,298 $ 486,378 $ 486,378
=========== =========== ===========
</TABLE>
(i) Certain items have been eliminated in consolidation.
F-34
<PAGE> 127
CORNERSTONE COMMUNITY BANK
BALANCE SHEET
As of March 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Cash and due from banks................................. $ 730,204
Interest-bearing deposits............................... 1,207,058
Securities available for sale........................... 1,868,704
Securities held to maturity............................. 7,049,716
Federal funds sold...................................... 1,850,000
Loans, net.............................................. 22,194,099
Premises, net........................................... 940,956
Accrued interest receivable............................. 217,219
Other assets............................................ 270,958
-----------
Total............................................ $36,328,914
===========
Liabilities and stockholders' equity:
Deposits................................................ $30,814,374
Other liabilities....................................... 146,890
-----------
Total liabilities................................ 30,961,264
-----------
Stockholders' equity:
Common stock.......................................... 590,130
Surplus............................................... 5,311,170
Retained earnings..................................... (503,180)
Unrealized appreciation (loss) on available-for-
sale securities...................................... (30,470)
-----------
Total stockholders' equity....................... 5,367,650
-----------
Total liabilities and stockholders' equity....... $36,328,914
===========
</TABLE>
F-35
<PAGE> 128
CORNERSTONE COMMUNITY BANK
STATEMENTS OF INCOME
Three Months ended March 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Interest income:
Interest and fees on loans................................. $ 495,695
Interest and dividends on securities....................... 130,009
Other interest income...................................... 45,352
----------
Total interest income...................................... 671,056
Interest expense:
Interest on deposits....................................... 348,378
Interest on other borrowed funds........................... -0-
Total interest expense..................................... 348,378
Net interest income........................................ 322,678
Provision for loan losses.................................. 79,516
Net interest income after provision........................ 243,162
Non-interest income........................................ 23,597
Non-interest expense....................................... 261,245
Income before income taxes................................. 5,514
Income taxes............................................... (5,432)
Net income................................................. $ 10,946
----------
Average shares outstanding................................. 590,130
==========
</TABLE>
F-36
<PAGE> 129
CORNERSTONE COMMUNITY BANK
STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net Income........................................... $ 10,946
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization..................... 16,468
Provision for loan losses......................... 79,516
Deferred income taxes............................. (5,432)
Net amortization of premium on securities......... 8,232
Changes in other operating assets and liabilities:
Accrued interest receivable..................... (50,513)
Accrued interest payable........................ 38,380
Other assets and liabilities.................... (38,527)
------------
Net cash used in operating activities 59,070
------------
Cash flows from investing activities
Purchase of securities available for sale............ --
Purchase of securities held to maturity.............. (3,388,419)
Principal collected on securities held to maturity... 633,400
Net increase in loans................................ (6,361,312)
Purchase of bank premises and equipment.............. (3,430)
------------
Net cash used in investing activities.......... (9,119,761)
------------
Cash flows from financing activities:
Net increase in deposits............................. 8,035,635
Issuance of common stock............................. --
Cash provided by financing activities................ 8,035,635
Net increase in cash and cash equivalents............ (1,025,056)
Cash and cash equivalents, beginning of period....... 4,812,318
Cash and cash equivalents, end of period............. $ 3,787,262
============
</TABLE>
F-37
<PAGE> 130
CORNERSTONE COMMUNITY BANK
Notes to Unaudited Financial Statements
For the Three Months Ended March 31, 1997
In the opinion of management, the accompanying unaudited financial
statements of Cornerstone Community Bank contain all adjustments, consisting of
only normal, recurring adjustments, necessary to fairly present the financial
results for the interim periods presented. The results of operations for any
interim period is not necessarily indicative of the results to be expected for
an entire year. These interim financial statements should be read in
conjunction with the annual financial statements and notes thereto.
F-38
<PAGE> 131
Report of Independent Certified Public Accountants
on the Financial Statements
To the Stockholders and Board of Directors
Cornerstone Community Bank
Chattanooga, Tennessee
We have audited the accompanying balance sheet of Cornerstone Community
Bank as of December 31, 1996, and the related statements of operations, changes
in stockholders' equity, and cash flows from inception (January 23, 1996)
through December 31, 1996. These financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cornerstone Community Bank
as of December 31, 1996, and the results of its operations and its cash flows
for the period from inception (January 23, 1996) through December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Hazlett, Lewis & Bieter, PLLC
- ---------------------------------
Chattanooga, Tennessee
February 13, 1997
F-39
<PAGE> 132
CORNERSTONE COMMUNITY BANK
BALANCE SHEET
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and due from banks $ 1,305,872
Interest-bearing deposits at other banks 1,206,446
Federal funds sold 2,300,000
Securities available for sale (Note 2) 1,924,725
Securities held to maturity (Note 2) 4,278,954
Loans, net of allowance for loan losses (Note 3) 15,912,303
Bank premises and equipment (Note 4) 949,340
Accrued interest receivable 166,706
Other assets 253,935
-----------
Total assets $28,298,281
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 1,647,691
Interest-bearing demand deposits 813,649
Money market accounts 2,636,778
Savings deposits 181,671
Time deposits (Note 5) 17,498,950
-----------
Total deposits 22,778,739
Accrued interest payable 75,119
Other liabilities 67,852
-----------
Total liabilities 22,921,710
-----------
Stockholders' equity (Note 10):
Preferred stock; no par value; 2,000,000 shares
authorized; no shares issued -
Common stock, $1.00 par value; 2,000,000 shares
authorized; 590,130 shares issued 590,130
Surplus 5,311,170
Undivided profits (deficit) (514,127)
Net unrealized loss on securities available
for sale, net of tax (10,602)
-----------
Total stockholders' equity 5,376,571
-----------
Total liabilities and stockholders' equity $28,298,281
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
F-40
<PAGE> 133
CORNERSTONE COMMUNITY BANK
STATEMENT OF OPERATIONS
From Inception (January 23, 1996) Through December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INTEREST INCOME
Loans $ 969,283
Securities 116,867
Federal funds sold and deposits in banks 144,668
----------
1,230,818
INTEREST EXPENSE 448,312
----------
Net interest income 782,506
Provision for loan losses (Note 3) 201,422
----------
Net interest income after provision for loan losses 581,084
----------
NONINTEREST INCOME
Service charges on deposit accounts 31,277
Other service charges, fees, and commissions 1,216
Other 5,188
----------
37,681
----------
NONINTEREST EXPENSES
Salaries and employee benefits 507,008
Occupancy expense of bank premises 46,197
Organization and start-up costs 376,301
Other operating expenses (Page F-53) 333,987
----------
1,263,493
----------
Loss before income tax benefit (644,728)
Income tax benefit (Note 6) (130,601)
----------
Net loss $ (514,127)
==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
F-41
<PAGE> 134
CORNERSTONE COMMUNITY BANK
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From Inception (January 23, 1996) Through December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Undivided Securities
Common Profits Available
Total Stock Surplus (Deficit) for Sale
---------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, at inception $ - $ - $ - $ - $-
Issuance of common stock 5,901,300 590,130 5,311,170 - -
Net loss (514,127) - - (514,127) -
Net changes in unrealized
loss on securities available
for sale (10,602) - - - (10,602)
---------- -------- ---------- --------- --------
BALANCE, December 31, 1996 $5,376,571 $590,130 $5,311,170 $(514,127) $(10,602)
========== ======== ========== ========= ========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
F-42
<PAGE> 135
CORNERSTONE COMMUNITY BANK
STATEMENT OF CASH FLOWS
From Inception (January 23, 1996) Through December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (514,127)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 53,795
Provision for loan losses 201,422
Deferred income taxes (130,601)
Net amortization of premium on securities 12,192
Changes in other operating assets and liabilities:
Accrued interest receivable (166,706)
Accrued interest payable 75,119
Other assets and liabilities (64,125)
------------
Net cash used in operating activities (533,031)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (1,941,825)
Purchase of securities held to maturity (5,139,394)
Principal collected on securities held to maturity 848,248
Net increase in loans (16,113,725)
Purchase of bank premises and equipment (987,994)
------------
Net cash used in investing activities (23,334,690)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 22,778,739
Issuance of common stock 5,901,300
------------
Net cash provided by financing activities $ 28,680,039
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,812,318
CASH AND CASH EQUIVALENTS, beginning of period -
------------
CASH AND CASH EQUIVALENTS, end of period $ 4,812,318
============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for interest $ 373,193
============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
F-43
<PAGE> 136
CORNERSTONE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of Cornerstone Community
Bank (Bank) conform with generally accepted accounting principles and
practices within the banking industry. The policies that materially
affect financial position and results of operations are summarized as
follows:
Nature of operations:
The Bank was incorporated under the laws of the state of
Tennessee on January 23, 1996, and began operations on February 20,
1996, at its office located in Hixson, Tennessee. The Bank's primary
deposit products are demand deposits, savings accounts, and
certificates of deposit. Its primary lending products are commercial
business loans, real estate loans, and installment loans.
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
A material estimate that is particularly susceptible to
significant change relates to the determination of the allowance for
losses on loans. In connection with the determination of the allowance
for losses on loans, management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary based on
changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process,
periodically review the Bank's allowance for losses on loans. Such
agencies may require the Bank to recognize additions to the allowance
based on their judgments about information available to them at the
time of their examination. Because of these factors, it is reasonably
possible that the allowance for losses on loans may change materially
in the near term.
Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, interest-bearing deposits
at other banks, and federal funds sold.
Securities held to maturity:
The Bank has the positive intent and ability to hold to maturity
or return of principal all securities held to maturity. Securities
held to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income over the period to
maturity.
F-44
<PAGE> 137
CORNERSTONE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (continued)
Securities available for sale:
Securities available for sale consist of mortgage-backed
securities not classified as securities held to maturity. Unrealized
holding gains and losses, net of tax, on securities available for sale
are reported as a net amount in a separate component of stockholders'
equity until realized. Gains and losses on the sale of securities
available for sale are determined using the specific-identification
method. Premiums and discounts are recognized in interest income over
the period to maturity.
Interest income on loans:
Interest on loans is recognized as income over the term of the loans
based on the principal amount outstanding. The accrual of interest on
loans is discontinued when a loan is determined to be impaired. A loan
is impaired when, in the opinion of management, there is an indication
that the borrower may be unable to meet payments as they become due. At
December 31, 1996, the Bank had no loans classified as impaired. The
interest accrual was not discontinued on any loans during the year
ended December 31, 1996.
Fee income on loans:
Loan origination fees and certain direct origination costs were
recognized as income and expense at the time the loan was recorded in
1996. The effect of not capitalizing these was not significant to the
accompanying financial statements.
Allowance for loan losses:
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which
is charged to expense, and reduced by charge-offs, net of recoveries.
Bank premises and equipment:
Bank premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using the straight-line
depreciation method and accelerated depreciation methods for both
financial statement purposes and income tax purposes. Bank premises
are depreciated over 30 years; and furniture, fixtures and equipment
are depreciated over 5 to 12 years.
Additions and major renewals and betterments are capitalized and
depreciated over their estimated useful lives. Repairs, maintenance,
and minor renewals are charged to operating expense as incurred. When
property is replaced or otherwise disposed of, the cost of such assets
and the related accumulated depreciation are removed from the
accounts. The gain or loss, if any, is recorded in the statement of
income.
Income taxes:
Income taxes are computed based on the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities are recognized for the extimated
future tax effects attributed to temporary differences between book
and tax bases of assets and liabilities and for carryforward
items. Deferred tax assets and liablities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes.
Note 2. Securities
Securities have been classified in the balance sheet according
to management's intent as either securities held to maturity or
securities available for sale.
F-45
<PAGE> 138
CORNERSTONE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Note 2. Securities (continued)
The amortized cost and approximate market value of securities at
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities available for sale:
Mortgage-backed securities $1,941,825 $ - $(17,100) $1,924,725
========== ======= ======== ==========
Securities held to maturity:
Mortgage-backed securities $4,278,954 $24,714 $ (49) $4,303,619
========== ======= ======== ==========
</TABLE>
Securities with a book value of approximately $551,000 at December 31,
1996, were pledged to secure various deposits.
Note 3. Loans and Allowance for Loan Losses
A summary of transactions in the allowance for loan losses for the
period ended December 31, 1996, is as follows:
<TABLE>
<S> <C>
Provision charged to operating expense $201,422
Recoveries of loans charged off -
Loans charged off -
--------
Balance, end of year $201,422
========
At December 31, 1996, the Bank's loans consist of the following (in
thousands):
Real estate loans $ 11,979
Commercial and industrial loans 2,316
Loans to individuals for household,
family, and other consumer expenditures 1,072
Other 746
--------
Total loans 16,113
Less - Allowance for loan losses (201)
--------
Net loans $ 15,912
========
</TABLE>
F-46
<PAGE> 139
CORNERSTONE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Note 3. Loans and Allowance for Loan Losses (continued)
The Bank's only significant concentration of credit at December
31, 1996, occurred in real estate loans which totaled approximately
$11,979,000. While real estate loans accounted for 74 percent of total
loans, these loans were primarily residential development and
construction loans, residential mortgage loans, commercial loans
secured by commercial properties, and consumer loans. Substantially
all real estate loans are secured by properties located in Tennessee.
In the normal course of business, the Bank makes loans to directors and
executive officers of the Bank on substantially the same terms,
including interest rates and collateral, as those prevailing at the
time for comparable transactions with other borrowers. Loans to
directors and executive officers totaled approximately $130,000 at
December 31, 1996.
At December 31, 1996, there were no loans specifically classified
as impaired by management. The interest accrual was not discontinued
on any loans during the year ended December 31, 1996.
Note 4. Bank Premises and Equipment
Bank premises and equipment at December 31, 1996, are summarized as
follows:
<TABLE>
<S> <C>
Land $300,000
Buildings and improvements 505,761
Furniture, fixtures and equipment 182,233
--------
987,994
Accumulated depreciation (38,654)
--------
$949,340
========
</TABLE>
The charge to operating expense for depreciation was $38,654 in 1996.
Note 5. Time Deposits
The aggregate amount of jumbo CDs, each with a minimum denomination of
$100,000, was $6,354,946 at December 31, 1996.
At December 31, 1996, the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C>
1997 $ 9,724,066
1998 6,600,570
1999 618,882
2000 -
2001 555,432
-----------
Total $17,498,950
===========
</TABLE>
F-47
<PAGE> 140
CORNERSTONE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Note 6. Income Taxes
The income tax benefit in the statement of income for the period ended
December 31, 1996, includes the following:
<TABLE>
<S> <C>
Current tax expense $ -
Deferred income taxes related to:
Provision for loan losses (18,200)
Net operating loss carryforward (46,600)
Organization and start-up costs (65,000)
Other (801)
---------
Income tax benefit $(130,601)
=========
</TABLE>
The income tax benefit is different from the expected tax benefit
computed by multiplying loss before income tax benefit by the statutory
federal income tax rates. The reasons for this difference relate to
the provision for loan losses, depreciation of bank premises and
equipment, and organization and start-up costs.
The Bank realized a net operating loss for tax purposes in 1996
which can be carried forward and used to offset future taxable income.
This net operating loss carryforward will expire in 15 years.
As of December 31, 1996, deferred tax assets recognized for
deductible temporary differences totaled $133,201, and deferred tax
liabilities for taxable temporary differences totaled $2,600.
A valuation allowance has not been provided to reduce the deferred
tax asset from the amount of tax benefit management believes
it will more likely than not realize. Realization of the net operating
loss carryforwards is not assured; however, management believes the
Bank has attained sufficient operations to generate future taxable
income of approximately $350,000 which would result in the
realization of such net operating loss carryforwards prior to
expiration in the year 2011.
Note 7. Employee Benefit Plan
The Bank has a 401(k) employee benefit plan covering substantially
all employees who have completed at least one year of service and met
minimum age requirements. The Bank made no contribution to the plan
in 1996.
Note 8. Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include various
commitments to extend credit and standby letters of credit.
These instruments expose the Bank to varying degrees of credit and
interest rate risk in excess of the amount recognized in the
accompanying balance sheet. To manage this risk, the Bank uses the
same management policies and procedures for financial instruments with
off-balance-sheet risk as it does for financial instruments whose risk
is reflected on the balance sheet.
F-48
<PAGE> 141
CORNERSTONE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Note 8. Financial Instruments With Off-Balance-Sheet Risk (continued)
The credit risk of all financial instruments varies based on
many factors, including the value of collateral held and other security
arrangements. To mitigate credit risk, the Bank generally determines
the need for specific covenant, guarantee, and collateral requirements
on a case-by-case basis, depending on the customer's creditworthiness.
The amount and type of collateral held to reduce credit risk vary, but
may include real estate, machinery, equipment, inventory, and accounts
receivable as well as cash on deposit, stocks, bonds, and other
marketable securities that are generally held in the Bank's possession.
This collateral is valued and inspected to ensure both its existence
and adequacy. The Bank requests additional collateral when
appropriate.
At December 31, 1996, commitments under standby letters of
credit and undisbursed loan commitments aggregated $4,081,000. The
Bank's credit exposure for these financial instruments is represented
by their contractual amounts. The Bank does not anticipate any
material losses as a result of the commitments under standby letters of
credit and undisbursed loan commitments.
Note 9. Stock Options and Warrants
The Bank has a stock option plan under which members of the
Board of Directors have been granted options to purchase a total of
145,000 shares of the Bank's common stock. The option price is $10.00
per share, and the options expire ten years from the date of grant.
The Bank also has a stock option plan under which officers and
employees have been granted options to purchase a total of 5,200 shares
of the Bank's common stock. The option price is $10.00 per share, and
the options expire ten years from the date of grant.
A stock warrant was issued with each original share of the
Bank's common stock which entitles each stockholder to purchase an
additional share of the Bank's common stock at a specified price. At
December 31, 1996, warrants for the purchase of 590,130 shares were
outstanding. The exercise price is $12.00 per share within two years
of issuance and $15.00 per share thereafter. If not exercised, such
options will expire five years after issuance.
Note 10. Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the Tennessee Department of Financial Institutions and
the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
F-49
<PAGE> 142
CORNERSTONE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Note 10. Regulatory Matters (continued)
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and
of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the
Commissioner of the Tennessee Department of Financial Institutions
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the
institution's prompt corrective action category.
The Bank's actual capital amounts and ratios are also presented
in the table. Dollar amounts are presented in thousands.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
-------------- --------------------
Amount Ratio Amount Ratio
------ ------ --------- ---------
<S> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $5,578 30.10% $1,482 8.00%
Tier I capital
(to risk-weighted assets) 5,377 29.02% 741 4.00%
Tier I capital
(to average assets) 5,377 23.39% 1,839 8.00%
</TABLE>
The Bank received its charter subject to certain financial and
nonfinancial conditions. The chartering conditions are as follows:
- The Bank cannot pay dividends for the first
three years of operation.
- Any changes in senior level officers and
directors for the first two years require written
regulatory approval.
- Director's fees are not to be paid until the
Bank has achieved an annual operating profit.
- The Bank must maintain a Tier I capital to
assets ratio of no less than 8% during the first three
years of operation.
- The Bank must maintain a minimum allowance for
loan losses ratio of 1.25% during the first three years of
operation.
The Bank was in compliance with all of these chartering
conditions at December 31, 1996.
F-50
<PAGE> 143
CORNERSTONE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Note 11. Subsequent Event
On March 18, 1997, the Bank entered into an agreement to merge
with The Bank of East Ridge. The total value of the transaction is
$6,125,000 consisting of 70 percent cash payment and 30 percent
issuance of common stock to shareholders of East Ridge Bancshares,
Inc., a one-bank holding company which owns all of the outstanding
shares of The Bank of East Ridge. The merged institutions will operate
as Cornerstone Community Bank. The merger will be consummated in 1997
and is subject to shareholder approval, discovery, and regulatory
approval.
F-51
<PAGE> 144
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON ACCOMPANYING INFORMATION
To the Stockholders and Board of Directors
Cornerstone Community Bank
Chattanooga, Tennessee
Our report on our audit of the basic financial statements of
Cornerstone Community Bank for 1996 appears on page 1. The audit was made for
the purpose of forming an opinion on the financial statements taken as a whole.
The accompanying information shown on page 15 is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the financial statements and, in our opinion, is fairly
stated in all material respects in relation to the financial statements taken as
a whole.
/s/ Hazlett, Lewis & Bieter, PLLC
Chattanooga, Tennessee
February 13, 1997, except for Notell,
as to which the date is March 18, 1997
F-52
<PAGE> 145
CORNERSTONE COMMUNITY BANK
OTHER OPERATING EXPENSES
From Inception (January 23, 1996) Through December 31, 1996
<TABLE>
<S> <C>
Depreciation - furniture and equipment $ 24,806
Software amortization 15,141
Advertising and promotions 39,876
Professional fees 49,570
Data processing 25,034
Insurance 15,049
Postage and courier fees 16,315
Office supplies 17,990
Stationery and printing 24,615
State franchise tax 14,750
Other expense categories (individually below $12,360) 90,841
--------
Total other operating expenses $333,987
========
</TABLE>
F-53
<PAGE> 146
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF THE 18th DAY OF MARCH, 1997
BY AND AMONG
CORNERSTONE COMMUNITY BANK,
EAST RIDGE BANCSHARES, INC.,
THE BANK OF EAST RIDGE
AND
DAVID E. YOUNG, INDIVIDUALLY
A-1
<PAGE> 147
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RECITALS .......................................................................................................A-1
ARTICLE I --THE MERGER..........................................................................................A-2
ARTICLE II -- ACTIONS PENDING MERGER............................................................................A-5
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF CORNERSTONE,
ERB, AND BANK OF EAST RIDGE...................................................................A-6
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF YOUNG..........................................................A-11
ARTICLE V -- COVENANTS.........................................................................................A-11
ARTICLE VI -- CONDITIONS TO CONSUMMATION.......................................................................A-14
ARTICLE VII -- TERMINATION ...................................................................A-16
ARTICLE VIII -- EFFECTIVE DATE AND EFFECTIVE TIME..............................................................A-17
ARTICLE IX -- OTHER MATTERS....................................................................................A-17
</TABLE>
A-2
<PAGE> 148
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of the 18th day of March 1997,
by and among CORNERSTONE COMMUNITY BANK ("Cornerstone"), a Tennessee banking
corporation, EAST RIDGE BANCSHARES, INC. ("ERB"), a Tennessee corporation, THE
BANK OF EAST RIDGE ("Bank of East Ridge"), a Tennessee banking corporation, and
DAVID E. YOUNG ("Young"), an individual residing in Hamilton County, Tennessee.
Recitals
1. Cornerstone. Cornerstone has been duly incorporated and is an
existing banking corporation in good standing under the laws
of the State of Tennessee, with its principal executive
offices located in Chattanooga, Tennessee. As of the date
hereof, Cornerstone has 2,000,000 authorized shares of common
stock, par value $1.00 per share, of which 590,130 shares are
outstanding as of January 31, 1997, and warrants to purchase
one additional share of Cornerstone common stock for each
share owned of which 590,130 are outstanding as of January 31,
1997, (Cornerstone common stock and warrants collectively,
"Cornerstone Common Stock") and 2,000,000 authorized shares of
preferred stock, no par value, none of which are outstanding
(no other class of capital stock being authorized).
2. ERB; Bank of East Ridge. ERB has been duly incorporated and is
an existing corporation in good standing under the laws of the
State of Tennessee, with its principal executive offices
located in East Ridge, Tennessee. As of the date hereof, ERB
has 150,000 authorized shares of common stock, par value
$10.00 per share ("ERB Common Stock"), of which 109,030 shares
are outstanding as of January 31, 1997 (no other class of
capital stock being authorized). At the Effective Time of the
Merger, the ERB charter will be amended to authorize 1,500,000
shares of common stock, par value $1.00 per share ("New ERB
Common Stock") and 1,500,000 authorized shares of preferred
stock, no par value. Bank of East Ridge has been duly
incorporated and is an existing banking corporation in good
standing under the laws of the State of Tennessee, with its
principal executive offices in East Ridge, Tennessee. ERB owns
all of the issued and outstanding common stock of Bank of East
Ridge.
3. Young. David E. Young is an individual residing in Hamilton
County, Tennessee. As of the date hereof, Young owns 76,139
shares of ERB Common Stock
4. Rights, Etc. Neither Cornerstone, ERB nor Bank of East Ridge
has any shares of its capital stock reserved for issuance, any
outstanding option, call or commitment relating to shares of
its capital stock or any outstanding securities, obligations
or agreements convertible into or exchangeable for, or giving
any person any right (including, without limitation,
preemptive rights) to subscribe for or acquire from it, any
shares of its capital stock (collectively, "Rights"), except
as set forth on Exhibit "A" hereto (as to Cornerstone) and
Exhibit "B" hereto (as to ERB and Bank of East Ridge).
5. Materiality. Unless the context otherwise requires, any
reference in this Agreement to materiality shall, as to ERB,
be deemed to be with respect to ERB and its subsidiaries taken
as a whole, as to Cornerstone shall be deemed to be with
respect to Cornerstone and as to Young shall be deemed to be
with respect to Young.
In consideration of their mutual promises and obligations hereunder,
and intending to be legally bound hereby, Cornerstone, ERB, Bank of East Ridge
and Young adopt and make this Agreement and prescribe the terms and conditions
hereof and the manner and basis of carrying it into effect, which shall be as
follows:
A-3
<PAGE> 149
ARTICLE I
THE MERGER
1.1 The Merger. On the Effective Date (as defined in Article VII),
Cornerstone will merge (the "Merger") with and into Bank of East Ridge, with
Bank of East Ridge being the surviving corporation (the "Surviving
Corporation"), pursuant to the provisions of, and with the effects provided in,
the Tennessee Business Corporation Act and the Tennessee Banking Act. At the
Effective Time (as defined in Article VII), the charter and bylaws of Bank of
East Ridge (as the Surviving Corporation) shall be the charter and bylaws of
Bank of East Ridge in effect immediately prior to the Effective Time. At the
Effective Time the charter and bylaws of ERB shall be amended and restated to
increase authorized shares of ERB common stock to 1,500,000 shares, change the
name of ERB to Cornerstone Bancshares, Inc. and include other provisions as set
forth on EXHIBIT "C". At the Effective Time the charter and bylaws of the Bank
of East Ridge shall be restated and amended to change the name of "Bank of East
Ridge" to "Cornerstone Community Bank" and to include other provisions as set
forth on EXHIBIT "D". At the Effective Time, the directors and officers of
Cornerstone shall be the directors and officers of the Surviving Corporation. At
the Effective Time, the directors and officers of Cornerstone shall also become
the directors and officers of ERB. The Plan of Merger is set forth as EXHIBIT
"E".
1.2 Conversion of Cornerstone Common Stock and ERB Common Stock.
By virtue of the Merger, automatically and without any action on the part of
the holder thereof, at the Effective Time, all of the Cornerstone Common
Stock issued and outstanding immediately prior to the Effective Time (other
than shares held directly or indirectly by ERB or any subsidiary of ERB, except
in a fiduciary capacity or in satisfaction of a debt previously contracted, and
other than shares held in the treasury of Cornerstone, which shares shall be
canceled, retired and cease to exist by virtue of the Merger and without any
payment made in respect thereof) shall be converted into the right to receive
shares of New ERB Common Stock, as described below:
(a) Shares of Cornerstone Common Stock and Stock Option
Plan.
(i) Shares of Cornerstone Common Stock. Each share of
Cornerstone Common Stock issued and outstanding at the
Effective Time shall become and be converted into one share of
New ERB Common Stock, and each outstanding warrant to purchase
one share of Cornerstone Common Stock at the Effective Time
shall become and be converted into one warrant to purchase one
share of New ERB Common Stock for $12.00 per share if
exercised by February 8, 1998 and for $15.00 per share if
exercised by February 8, 2001 (the "Cornerstone Exchange
Ratio");
(ii) Cornerstone Stock Option Plan. ERB shall adopt a
new stock option plan substantially in the form set forth in
Exhibit F. The Cornerstone Statutory-Nonstatutory Stock Option
Plan (the "Plan") and all options issued under the Plan will
be terminated at the Effective Time, and the new ERB stock
option plan shall substitute new options for the terminated
options in a transaction described in Section 424(a) of the
Code. The holders of all outstanding statutory or nonstatutory
options issued under the Plan will receive identical statutory
or nonstatutory options to purchase shares of ERB Common Stock
subject to the same terms and conditions of the outstanding
options issued under the Plan in cancellation of their
Cornerstone options. All option holders shall receive credit
under the vesting schedule with respect to the new ERB options
from the date of the grant of the Cornerstone options.
(b) Shares of ERB Common Stock. Each shareholder of
ERB Common Stock issued and outstanding at the Effective Time
shall have the option to elect from the following:
(i) exchange all or a designated portion of the
shares of ERB Common Stock for shares of New ERB Common Stock
based on an exchange ratio ("ERB Exchange Ratio") determined
by multiplying the number of shares of ERB Common Stock held
by such shareholder for which he or she elects to be
A-4
<PAGE> 150
exchanged by $56.1772 and then dividing by $12.00 (the agreed
fair market value of Cornerstone Common Stock); or
(ii) exchange all or a designated portion of the
shares of ERB Common Stock for cash in the amount of $56.1772
per share. If an ERB shareholder elects to receive in cash all
or a portion of the consideration to which such shareholder is
entitled, the amount of cash to be delivered in exchange for
each share of ERB Common Stock shall be determined by
multiplying the number of shares of ERB Common Stock held by
such shareholder for which he or she elects to receive cash by
$56.1772 per share; provided, however, the obligation of ERB
to redeem ERB Common Stock for cash shall be limited to
$4,287,500, in the aggregate. In the event ERB shareholders in
the aggregate elect to exchange ERB Common Stock for more than
$4,287,500, ERB shall pay cash to shareholders who have
elected to exchange their ERB Common Stock for cash on a
pro-rata basis with the balance of the consideration due to
such ERB shareholders to be in the form of New ERB Common
Stock based on a value of $12.00 per share within the
limitation set forth above. In no event shall ERB deliver in
cash more than $4,287,500. In the event ERB shareholders elect
to receive less than $2,900,000, Cornerstone may terminate
this Agreement in accordance with the provisions of Section
6.2(f).
(c) Change In ERB Common Stock Shares. Subsequent to the date
of this Agreement but prior to the Effective Date, if the outstanding
shares of ERB Common Stock shall be increased, decreased, changed into
or exchanged for a different number or class of shares by reason of any
reclassification, recapitalization, stock split or reverse stock split,
split-up or if a stock dividend thereon shall be declared with a record
date within such period, or other like changes in ERB's capitalization
shall have occurred, the terms and provisions of Sections 1.2(a) and
1.2(b) shall be adjusted accordingly.
(d) Young. Young agrees to exchange at least seventy percent
(70%) of all shares of ERB Common Stock held by him for cash in the
amount of $56.1772 per share subject to the limitations set forth in
Section 1.2(b)(ii).
1.3 No Fractional Shares. Notwithstanding any other provision
hereof, no fractional shares of New ERB Common Stock and no certificates or
scrip therefor, or other evidence of ownership thereof, will be issued in the
Merger; instead, ERB shall pay to each holder of ERB Common Stock exchanged
pursuant to this Agreement who would otherwise be entitled to a fractional share
an amount in cash determined by multiplying such holder's fractional interest by
$12.00 (rounded to the nearest cent).
1.4 Procedures.
(a) Exchange of Certificates.
(i) Exchange of Certificates by Cornerstone
Shareholders for ERB Common Stock. Certificates which
represent shares of Cornerstone Common Stock that are
outstanding at the Effective Time (each, a "Certificate") and
are converted into the right to receive shares of New ERB
Common Stock and warrants to purchase New ERB Common Stock
pursuant to the Merger shall, after the Effective Time, be
exchangeable by the holders thereof in the manner provided in
the transmittal materials described below for new certificates
representing the shares of New ERB Common Stock into which
such shares have been converted.
(ii) Exchange of Certificates for Cash and/or ERB
Common Stock. Certificates which represent shares of ERB
Common Stock that are outstanding at the Effective Time (each,
a "Certificate") and are exchanged for cash or New ERB Common
Stock in accordance with the provisions of Section 1.2 shall,
after the Effective Time, be exchanged by the holders thereof
in the
A-5
<PAGE> 151
manner provided in the transmittal materials described below
for cash or new certificates representing shares of New ERB
Common Stock.
(b) Surrender of Certificates.
(i) Surrender of Cornerstone Common Stock. As
promptly as practicable after the Effective Date, ERB shall
send to each holder of record of shares of Cornerstone Common
Stock outstanding at the Effective Time transmittal materials
for use in exchanging the Certificates for certificates for
shares and warrants of the New ERB Common Stock into which
such shares and warrants of the Cornerstone Common Stock have
been converted pursuant to the Merger. Upon surrender of a
Certificate, together with a duly executed letter of
transmittal and any other required documents, the holder of
such Certificate shall be entitled to receive in exchange
therefor a certificate and warrant for the number of shares of
New ERB Common Stock to which such holder is entitled. If any
such delivery is to be made in whole or in part to a person
other than the person in whose name a surrendered Certificate
is registered, it shall be a condition to such delivery or
exchange that the Certificate surrendered shall be properly
endorsed or shall be otherwise in proper form for transfer and
that the person requesting such delivery or exchange shall
have paid any transfer and other taxes required by reason of
such delivery or exchange in a name other than that of the
registered holder of the Certificate surrendered or shall have
established to the reasonable satisfaction of ERB or its agent
that such tax either has been paid or is not payable.
(ii) Surrender of ERB Common Stock. As promptly as
practicable after the Effective Date, ERB shall send to each
holder of record of shares of ERB Common Stock outstanding at
the Effective Time transmittal materials for use in exchanging
the Certificates for (x) certificates representing shares of
the New ERB Common Stock for which such shares of the ERB
Common Stock have been exchanged pursuant to Section 1.2, or
(y) cash, as the case may be. Upon surrender of a Certificate,
together with a duly executed letter of transmittal and any
other required documents, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate for
the number of shares of New ERB Common Stock or cash, as the
case may be, to which such holder is entitled. If any such
delivery is to be made in whole or in part to a person other
than the person in whose name a surrendered Certificate is
registered, it shall be a condition to such delivery or
exchange that the Certificate surrendered shall be properly
endorsed or shall be otherwise in proper form for transfer and
that the person requesting such delivery or exchange shall
have paid any transfer and other taxes required by reason of
such delivery or exchange in a name other than that of the
registered holder of the Certificate surrendered or shall have
established to the reasonable satisfaction of ERB or its agent
that such tax either has been paid or is not payable.
Notwithstanding the foregoing, in the event ERB shareholders
in the aggregate elect to exchange ERB Common Stock for more
than $4,287,500, ERB shall pay cash to shareholders who have
elected to exchange their ERB Common Stock for cash on a
pro-rata basis to the extent possible within the limitation
set forth above. In no event shall ERB deliver in cash more
than $4,287,500.
(c) Cornerstone Shareholders: Rights and
Dividends/Distributions. No holder of Cornerstone Common Stock shall be
entitled to exercise any rights as a shareholder of ERB until such
holder shall have properly surrendered its Certificate(s) (together
with all required documents) as set forth above. No dividend or other
distribution payable after the Effective Time with respect to the New
ERB Common Stock shall be paid to the holder of any unsurrendered
Certificate until the holder thereof properly surrenders such
Certificate (together with all required documents), at which time such
holder shall receive all dividends and distributions, without interest
thereon, previously withheld from such holder pursuant hereto. After
the Effective Time, there shall be no transfers on the stock transfer
books of Cornerstone of shares of Cornerstone Common Stock which were
issued and outstanding at the Effective Time and converted pursuant to
the provisions of the Merger into the right to receive New ERB Common
Stock. If after the Effective Time, Certificates are presented for
transfer to Cornerstone, they shall be cancelled and exchanged for the
shares of
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New ERB Common Stock deliverable in respect thereof as determined in
accordance with the provisions of Section 1.2 and in accordance with
the procedures set forth in this Section 1.4(c).
(d) Cornerstone and Redeeming ERB Shareholders: Rights. After
the Effective Time, holders of Cornerstone Common Stock shall cease to
be, and shall have no rights as, shareholders of Cornerstone, other
than to receive shares of New ERB Common Stock into which such shares
have been converted or fractional share payments pursuant to this
Agreement.
After the Effective Time, holders of ERB Common Stock who choose to
redeem their shares of ERB Common Stock shall cease to be, and shall
have no rights as, shareholders of ERB as to the shares of ERB Common
Stock redeemed, other than to receive (i) shares of New ERB Common
Stock for which such shares have been exchanged or (ii) cash, as the
case may be, pursuant to this Agreement.
(e) Liability to Former Shareholders. Notwithstanding the
foregoing, neither ERB nor Cornerstone nor any other person shall be
liable to any former holder of shares of Cornerstone or ERB Common
Stock for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(f) Certificate Replacement. In the event any Certificate
shall have been lost, stolen or destroyed, upon receipt of appropriate
evidence as to such loss, theft or destruction and to the ownership of
such Certificate by the person claiming such Certificate to be lost,
stolen or destroyed and the receipt by ERB of appropriate and customary
indemnification including, when appropriate, the posting of bond, ERB
will issue in exchange for such lost, stolen or destroyed certificate
shares of New ERB Common Stock and the fractional share payment, if
any, deliverable in respect thereof as determined in accordance with
Section 1.3 or cash as the case may be.
ARTICLE II
ACTIONS PENDING MERGER
Prior to the earlier of the Effective Time or termination of this
Agreement by either party under Article VII, the parties agree to the following
restrictions and actions.
2.1 Cornerstone and ERB Common Stock; Other Mergers/Consolidations.
Subject to Section 2.3, without the prior written consent of Cornerstone, ERB
and Bank of East Ridge will not, and without the prior written consent of ERB,
Cornerstone will not:
(a) make, declare or pay any dividend on ERB Common Stock or
declare or make any distribution on, or directly or indirectly combine,
redeem, reclassify, purchase or otherwise acquire, any shares of its
capital stock (other than in a fiduciary capacity or in respect of a
debt previously contracted in good faith) or authorize the creation or
issuance of or issue or sell or permit any subsidiary to issue or sell
any additional shares of ERB's capital stock, or any options, calls or
commitments relating to its capital stock, or any securities,
obligations or agreements convertible into or exchangeable for, or
giving any person any right to subscribe for or acquire, shares of its
capital stock or the capital stock of any subsidiary; and/or
(b) merge or consolidate or permit any subsidiary to merge or
consolidate with any other entity or engage in any similar transaction
or sell or otherwise dispose of the stock of Bank of East Ridge.
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2.2 Cornerstone and ERB Operations. Without the prior written consent
of Cornerstone, which consent will not be unreasonably withheld, ERB will not
and will not permit any subsidiary to, and without the prior written consent of
ERB, which consent will not be unreasonably withheld, Cornerstone will not:
(a) pay any bonus to, or increase the rate of compensation of,
any of its directors, officers or employees or enter into any
employment contracts with any persons;
(b) enter into or modify or permit any subsidiary to enter
into or modify (except as may be required by applicable law and except
for the renewal of any existing plan or arrangement in the ordinary
course of business consistent with past practice) any pension,
retirement, stock option, stock purchase, savings, profit sharing,
deferred compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare contract, plan or arrangement,
or any trust agreement related thereto, in respect of any of its
directors, officers or other employees;
(c) except as contemplated by Section 1.2 and 5.13,
substantially modify the manner in which it and its subsidiaries have
heretofore conducted their business, taken as a whole, or amend its
charter or by-laws;
(d) except for transactions in the ordinary course of its
banking business, sell, dispose of or discontinue or permit any
subsidiary to sell, dispose or discontinue any of its business, assets
(including investment securities) or property;
(e) except for the acquisition of loans, investment securities
and cash equivalent assets in the ordinary course of its banking
business, acquire (other than through foreclosure or satisfaction in
whole or in part of indebtedness owed ERB) any assets or business that
is material to such party;
(f) except in the ordinary course of its banking business,
enter into off-balance sheet transactions;
(g) take any other action not in the ordinary course of
business of it or its subsidiaries;
(h) make any negative provision to the reserve for possible
loan losses of Bank of East Ridge unless required by a regulatory
authority having jurisdiction; or
(i) directly or indirectly agree to take any of the foregoing
actions.
2.3 Bank of East Ridge Dividends. Immediately prior to the Effective
Time and subject to the satisfaction of the conditions precedent in Article VI,
ERB shall cause Bank of East Ridge to declare and pay a dividend to ERB at such
time and in such amount as may be requested by Cornerstone. ERB shall take and
shall cause Bank of East Ridge to take all appropriate and necessary steps,
including without limitation, obtaining the requisite approval from the
Tennessee Department of Financial Institutions ("TDFI") and the Federal Deposit
Insurance Corporation ("FDIC") for the declaration and payment of such dividend.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CORNERSTONE,
ERB, AND BANK OF EAST RIDGE
Cornerstone represents and warrants to ERB and Bank of East Ridge (as
to itself, but not as to ERB and Bank of East Ridge), and ERB and Bank of East
Ridge represent and warrant to Cornerstone (as to themselves, but not as to
Cornerstone), that, except as previously disclosed in a letter of Cornerstone or
ERB and Bank of East Ridge, respectively, of even date herewith delivered to the
other party or in the Exhibits attached hereto:
3.1 Recitals of Fact. The facts set forth in the Recitals of this
Agreement with respect to it are true and correct.
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3.2 Capital Stock Shares. The outstanding shares of capital stock of it
are duly authorized, validly issued and outstanding, fully paid and
non-assessable, and subject to no preemptive rights.
3.3 Jurisdictional Power and Authority. Each of it has the power and
authority, and is duly qualified in all jurisdictions where such qualification
is required, to carry on its business as it is now being conducted and to own
all its material properties and assets, and it has all federal, state, local,
and foreign governmental authorizations necessary for it to own or lease its
properties and assets and to carry on its business as it is now being conducted,
except for such powers and authorizations the absence of which, either
individually or in the aggregate, would not have a Material Adverse Effect as
defined in Section 9.1.
3.4 Capital Stock Shares. The shares of capital stock are owned by it
free and clear of all liens, claims, encumbrances and restrictions on transfer
and there are no rights with respect to such capital stock.
3.5 Validity of Agreement. Subject to approval of its board of
directors and any required shareholder approval of this Agreement and the
Merger, this Agreement is a valid and binding agreement of it enforceable
against it in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
3.6 Breaches or Violations. The execution, delivery and performance of
this Agreement by it does not, and the consummation of the transactions
contemplated hereby by it will not, constitute (a) a breach or violation of, or
a default under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of it or
its subsidiaries or to which it or its subsidiaries (or any of their respective
properties) is subject, which breach, violation or default, individually or
collectively, will have a Material Adverse Effect, or enable any person to
enjoin any of the transactions contemplated hereby or (b) a breach or violation
of, or a default under, the charter or bylaws of it; and the consummation of the
transactions contemplated hereby will not require any consent or approval under
any such law, rule, regulation, judgment, decree, order, governmental permit or
license or the consent or approval of any other party to any such agreement,
indenture or instrument, other than the required approvals of applicable
regulatory authorities referred to in Sections 6.1(b) and (c) and the approval
of the respective board of directors and shareholders of ERB, Bank of East Ridge
and Cornerstone referred to in Section 3.5 and other than any consents and
approvals the absence of which will not have a Material Adverse Effect.
3.7 Financial Statements. Each of the balance sheets in or incorporated
by reference into the audited financial statements (including the related notes
and schedules) for the year ended December 31, 1996 and the most recent
unaudited financial statements fairly presents the financial position of the
entity or entities to which it relates as of its date and each of the income
statements and statements of stockholder equity and of cash flow and changes in
financial position or equivalent statements in or incorporated by reference into
its audited financial statements (including any related notes and schedules) and
the most recent unaudited financial statements fairly presents the results of
operations, retained earnings and cash flows and changes in financial position,
as the case may be, of the entity or entities to which it relates for the
periods set forth therein (subject, in the case of unaudited interim statements
or reports, to normal year-end audit adjustments that are not material in amount
or effect), in each case in accordance with generally accepted accounting
principles ("GAAP") applicable to banks and bank holding companies, consistently
applied during the periods involved, except as may be noted therein. It has no
obligations or liabilities (whether absolute, accrued, contingent or otherwise)
which are not disclosed in the audited financial statements, the omission of
which would singly or in the aggregate have a Material Adverse Effect. Since the
date of its audited financial statements, it has not incurred any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of any nature
except liabilities or obligations incurred in the ordinary course of business or
which would singly or in the aggregate have a Material Adverse Effect.
3.8 Financial Condition. There has been no adverse change in the
financial condition of it, since December 31, 1996, which has had a Material
Adverse Effect.
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3.9 Taxes; Tax Returns; Tax Liabilities. All material federal, state,
local, and foreign tax returns required to be filed by or on behalf of it or any
of its subsidiaries have been timely filed or requests for extensions have been
timely filed and any such extension shall have been granted and not have
expired, and all such returns filed are complete and accurate in all material
respects. All taxes shown on returns filed by it have been paid in full or
adequate provision has been made for any such taxes on its balance sheet (in
accordance with GAAP). As of the date of this Agreement, there is no audit
examination, deficiency, or refund litigation with respect to any taxes of it
and it is not aware of any basis for the assertion of any claim for any tax
deficiency for which adequate provision has not been made on its balance sheet
that would result in a determination that would have a Material Adverse Effect.
All taxes, interest, additions, and penalties due with respect to completed and
settled examinations or concluded litigation relating to it have been paid in
full or adequate provision has been made for any such taxes on its balance sheet
(in accordance with GAAP). It has not executed an extension or waiver of any
statute of limitations on the assessment or collection of any material tax due
that is currently in effect.
3.10 Pending Litigation and/or Other Binding Agreements.
(a) Pending Litigation. Except as disclosed in Exhibit 3.10(A)
as to Cornerstone or Exhibit 3.10(B) as to ERB and Bank of East Ridge
hereto, no litigation, proceeding or controversy before any court or
governmental agency is pending, and there is no pending claim, action
or proceeding against it or any of its subsidiaries, which in the
reasonable judgment of its Chief Executive Officer is likely to have a
Material Adverse Effect or to prevent consummation of the transactions
contemplated hereby, and, to the best of its knowledge, no such
litigation, proceeding, controversy, claim or action has been
threatened or is contemplated, and, to its knowledge, there are no
facts or circumstances which could form the reasonable basis for any
claim, action or proceeding (including, but not limited to, a claim for
violation of any state or federal fair lending laws or regulations)
which is likely to have a Material Adverse Effect or prevent
consummation of the transactions contemplated hereby.
(b) Binding Agreements. Neither it nor any of its subsidiaries
is subject to any cease and desist order, written agreement or
memorandum of understanding with, or a party to any commitment letter
or similar undertaking to, or is subject to any order or directive by,
or is a recipient of any extraordinary supervisory letter from, or is
subject to any board resolutions at the request of, federal or state
governmental authorities charged with the supervision or regulation of
banks or bank holding companies or engaged in the insurance of bank
deposits ("Bank Regulators"), nor has it been advised by any Bank
Regulator that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such
order, directive, written agreement, memorandum of understanding,
extraordinary supervisory letter, commitment letter, board resolutions
or similar undertaking.
3.11 Material Contracts. Except as disclosed in Exhibit 3.11(A) hereto
in the case of Cornerstone and Exhibit 3.11(B) hereto in the case of ERB and
Bank of East Ridge and except for this Agreement and arrangements made in the
ordinary course of business, it is not bound by any material contract (as
defined in Item 601(b)(10)(i) and (ii) of Regulation S-K promulgated under the
Securities Act of 1933, as amended) to be performed after the date hereof that
has not been filed with or incorporated by reference in the audited financial
statement.
3.12 Employee Benefit Plans. All "employee benefit plans," as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974
("ERISA"), that cover any of its and as to ERB, its or any of its subsidiaries,
employees comply in all material respects with all applicable requirements of
ERISA, the Code and other applicable laws and no event has occurred and, to its
knowledge, no fact or circumstance exists with respect to any employee benefit
plan now or previously existing which would result in a Material Adverse Effect
on ERB or Cornerstone; neither it nor as to ERB any of its subsidiaries, has
engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or
Section 4975 of the Code) with respect to any such plan which is likely to
result in any material penalties or taxes under Section 502(i) of ERISA or
Section 4975 of the Code; no material liability to the Pension Benefit Guaranty
Corporation has been or is expected by it or them to be incurred with respect to
any such plan which is subject to Title IV of ERISA ("Pension Plan"), or with
respect to any "single-employer plan" (as defined in Section 4001(a)(15) of
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ERISA) currently or formerly maintained by it, them or any entity which is
considered one employer with it under Section 4001 of ERISA or Section 414 of
the Code; no Pension Plan had an "accumulated funding deficiency" [as defined in
Section 302 of ERISA (whether or not waived)] as of the last day of the end of
the most recent plan year ending prior to the date hereof; the fair market value
of the assets of each Pension Plan exceeds the present value of the "benefit
liabilities" (as defined in Section 4001(a)(16) of ERISA) under such Pension
Plan as of the end of the most recent plan year with respect to the respective
Plan ending prior to the date hereof, calculated on the basis of the actuarial
assumptions used in the most recent actuarial valuation for such Pension Plan as
of the date hereof; no notice of a "reportable event" (as defined in Section
4043 of ERISA) for which the thirty (30) day reporting requirement has not been
waived has been required to be filed for any Pension Plan within the twelve (12)
month period ending on the date hereof; neither it nor as to ERB, any of its
subsidiaries has provided, or is required to provide, security to any Pension
Plan pursuant to Section 401(a)(29) of the Code; it and as to ERB its
subsidiaries have not contributed to a "multiemployer plan" as defined in
Section 3(37) of ERISA, on or after September 26, 1980; and it and as to ERB its
subsidiaries do not have any obligations for retiree health and life benefits
under any benefit plan, contract or arrangement.
3.13 Title to Property. Except as set forth in Exhibit 3.13(A) as to
Cornerstone and Exhibit 3.13(B) as to ERB and Bank of East Ridge, each of it and
its subsidiaries has good title to its properties and assets (other than
property as to which it is lessee) except for such defects in title which would
not, in the aggregate, have a Material Adverse Effect on it.
3.14 Regulatory Approvals. It knows of no reason why the regulatory
approvals referred to in Sections 6.1(b) and (c) should not be obtained without
the imposition of any condition of the type referred to in the proviso following
such Sections 6.1(b) and (c).
3.15 Loan Reserve. Its reserve for possible loan losses as shown in its
audited financial statements for the year ended December 31, 1996, was adequate
in all material respects under GAAP applicable to banks and bank holding
companies and safe and sound banking practices.
3.16 Permits, etc. and Filings, etc. It has all permits, licenses,
certificates of authority, orders, and approvals of, and have made all filings,
applications, and registrations with, federal, state, local, and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as it is presently conducted and the absence of which
would have a Material Adverse Effect; all such permits, licenses, certificates
of authority, orders, and approvals are in full force and effect, and to the
best knowledge of it no suspension or cancellation of any of them is threatened.
3.17 Capital Stock Shares. In the case of ERB, the shares of capital
stock to be issued pursuant to this Agreement and the Merger, when issued in
accordance with the terms of this Agreement and the Merger, will be duly
authorized, validly issued, fully paid and nonassessable and subject to no
preemptive rights.
3.18 Collective Bargaining. It is not a party to, nor is it bound by,
any collective bargaining agreement, contract, or other agreement or
understanding with a labor union or labor organization, nor is it or any of its
subsidiaries the subject of a proceeding asserting that it or any such
subsidiary has committed an unfair labor practice or seeking to compel it or
such subsidiary to bargain with any labor organization as to wages and
conditions of employment, nor is there any strike or other labor dispute
involving it or any of its subsidiaries pending or threatened.
3.19 Broker/Finder Fees. Neither it, nor any of their respective
officers, directors, or employees, has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commissions, or
finder's fees, and no broker or finder has acted directly or indirectly for it
or any of its subsidiaries, in connection with this Agreement or the
transactions contemplated hereby.
3.20 Untrue Statements. The information to be supplied by it for
inclusion in (1) the Registration Statement on Form S-4 and/or such other
form(s) as may be appropriate to be filed under the Securities Act of 1933, as
amended
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(the "Securities Act"), with the SEC by ERB for the purpose of, among other
things, registering the ERB Common Stock to be issued to the shareholders of
Cornerstone in the Merger (the "Registration Statement"), or (2) the proxy
statements to be distributed in connection with ERB's and Cornerstone's meetings
of their respective shareholders to vote upon this Agreement (as amended or
supplemented from time to time, the "Proxy Statement", and together with the
prospectus included in the Registration Statement, as amended or supplemented
from time to time, the "Proxy Statement/Prospectus") will not at the time such
Registration Statement becomes effective, and in the case of the Proxy
Statement/Prospectus at the time it is mailed and at the time of the meeting of
shareholders contemplated under this Agreement, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
3.21 Environmental Law Violations.
(a) Definitions. For purposes of this section, the following
terms shall have the indicated meanings:
"Environmental Law" means any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree, injunction
or agreement with any governmental entity relating to (a) the
protection, preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water, groundwater,
drinking water supply, surface soil, subsurface soil, plant and animal
life or any other natural resource); and/or (b) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances. The
term "Environmental Law" includes, without limitation, (1) the
Comprehensive Environmental Response, Compensation and Liability Act,
as amended, 42 U.S.C. ss. 9601, et seq., the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. ss. 6901, et seq., the Clean Air
Act, as amended, 42 U.S.C. ss. 7401, et seq., the Federal Water
Pollution Control Act, as amended, 33 U.S.C. ss. 1251, et seq., the
Toxic Substances Control Act, as amended, 15 U.S.C. ss. 9601, et seq.,
the Emergency Planning and Community Right to Know Act, 42 U.S.C. ss.
11001, et seq., the Safe Drinking Water Act, 42 U.S.C. ss. 300f, et
seq., all comparable state and local laws; and (2) any common law
(including, without limitation, common law that may impose strict
liability) that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Substance.
"Hazardous Substance" means any substance presently listed,
defined, designated or classified as hazardous, toxic, radioactive or
dangerous, or otherwise regulated, under any Environmental Law, whether
by type or by quantity, including any material containing any such
substance as a component. Hazardous Substances include, without
limitation, petroleum or any derivative or by-product thereof,
asbestos, radioactive material, and polychlorinated biphenyls.
"Loan Portfolio Properties and Other Properties Owned" means
those properties now or previously owned or operated by Cornerstone or
ERB or any of their subsidiaries including properties owned or operated
in a fiduciary capacity.
(b) Violations by Corporate/Subsidiary. It has not been in
violation of or liable under any Environmental Law, except any such
violations or liabilities which would not reasonably be expected to
singly or in the aggregate have a Material Adverse Effect.
(c) Violations by Loan Portfolio Properties and Other
Properties Owned. None of the Loan Portfolio Properties and Other
Properties Owned by it or its subsidiaries have been or are in
violation of or liable under any Environmental Law, except any such
violations or liabilities which singly or in the aggregate will not
have a Material Adverse Effect.
(d) Pending Liability. To the best knowledge of it and its
subsidiaries, there are no actions, suits, demands, notices, claims,
investigations or proceedings pending or threatened relating to the
liability of the
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Loan Portfolio Properties and Other Properties Owned by it or its
subsidiaries under any Environmental Law, including, without
limitation, any notices, demand letters or requests for information
from any federal or state environmental agency relating to any such
liabilities under or violations of Environmental Law, except such which
will not have or result in a Material Adverse Effect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF YOUNG
Young represents and warrants to Cornerstone, that, except as
previously disclosed in a letter of Cornerstone of even date herewith delivered
to the other party or in the Exhibits attached hereto:
4.1 Recitals of Fact. The facts set forth in the Recitals of this
Agreement with respect to Young are true and correct.
4.2 Jurisdictional Power and Authority. Young has full power and
authority to execute and deliver this Agreement and to perform his obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of Young, enforceable in accordance with its terms and conditions. Young need
not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to
consummate the transactions contemplated by this Agreement.
4.3 Breaches or Violations. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby,
will (A) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Young is subject or, (B) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under any agreement, contract, lease, license, instrument,
or other arrangement to which Young is a party or by which he is bound or to
which any of his assets are subject.
4.4 Capital Stock Shares. Young holds of record and owns beneficially
76,139 shares of ERB Common Stock. Except as set forth in Exhibit 4.4, all of
Young's shares are owned by him free and clear of any restrictions on transfer
or other liens (other than any restrictions under the Securities Act and state
securities laws). Young is not a party to any option, warrant, purchase right,
or other contract or commitment that could require Young to sell, transfer, or
otherwise dispose of any capital stock of ERB, and Young is not a party to any
voting trust, proxy, or other agreement or understanding with respect to the
voting of any capital stock of the ERB.
ARTICLE V
COVENANTS
Except as otherwise provided below, Cornerstone hereby covenants to
ERB, and ERB and Bank of East Ridge hereby covenant to Cornerstone, that:
5.1 Best Efforts. It shall use its best efforts in good faith to take
or cause to be taken all action necessary or desirable under this Agreement on
its part as promptly as practicable so as to permit the consummation of the
transactions contemplated by this Agreement at the earliest possible date and
cooperate fully with the other party hereto to that end.
5.2 Shareholders' Meeting and Approval. It shall (a) take all steps
necessary to duly call, give notice of, convene and hold a meeting of its
shareholders for the purpose of approving this Agreement as soon as is
reasonably practicable; (b) recommend to its shareholders that they approve this
Agreement and use its best efforts to obtain such approval; (c) distribute to
its shareholders the Proxy Statement/Prospectus in accordance with applicable
federal and
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state law and with its certificates of incorporation or charter, as the case may
be, and bylaws; and (d) cooperate and consult with Cornerstone with respect to
each of the foregoing matters.
5.3 Preparation/Filing of Proxy Statement/Prospectus and Registration
Statement. It will cooperate in the preparation and filing of the Proxy
Statement/Prospectus and Registration Statement in order to consummate the
transactions contemplated by this Agreement as soon as is reasonably
practicable.
5.4 Effective Time of Registration Statement; Stop Orders, etc. In the
case of ERB, it will advise Cornerstone, promptly after ERB receives notice
thereof, of the time when the Registration Statement has become effective or any
supplement or amendment has been filed, of the issuance of any stop order or the
suspension of the qualification of the shares of New ERB Common Stock issuable
pursuant to this Agreement for offering or sale in any jurisdiction, of the
initiation or threat of any proceeding for any such purpose or of any request by
the SEC for the amendment or supplement of the Registration Statement or for
additional information.
5.5 Blue Sky Permits. It shall use its reasonable best efforts to
obtain, prior to the effective date of the Registration Statement, all necessary
state securities law or "Blue Sky" permits and approvals required to carry out
the transactions contemplated by this Agreement.
5.6 Press Releases. Subject to its disclosure obligations imposed by
law, unless approved by the other party hereto in advance, it will not issue any
press release or written statement for general circulation relating to the
transactions contemplated hereby. As to any disclosure obligation imposed by
law, it will deliver to the other party a copy of such press release or written
notice as soon as practicable and in any event, prior to its issuance.
5.7 Copies of Written Communications. It shall promptly furnish the
other party with copies of written communications received by it, or any of its
respective subsidiaries, Affiliates or Associates (as such terms are defined in
Rule 12b-2 under the Securities Exchange Act of 1934, as amended, as in effect
on the date hereof), from, or delivered by any of the foregoing to, any
governmental body or agency in connection with or material to the transactions
contemplated hereby.
5.8 Access to Corporate Information.
(a) Access to Corporate Records. Upon reasonable notice, it
shall afford the other party hereto, and its officers, employees,
counsel, accountants and other authorized representatives
(collectively, such party's "Representatives") access, during normal
business hours, to all of its and its subsidiaries' properties, books,
contracts, tax returns, commitments and records; it shall enable the
other party's Representatives to discuss its business affairs,
condition (financial and otherwise), assets and liabilities with such
third persons, including, without limitation, its directors, officers,
employees, accountants and counsel, as the other party considers
necessary or appropriate; and it shall furnish promptly to the other
party hereto (i) a copy of each report, schedule and other document
filed by it and to be filed prior to the Effective Time pursuant to the
requirements of federal or state securities or banking laws since
December 31, 1996; and (ii) all other information concerning its
business, properties and personnel as the other party hereto may
reasonably request, provided that no investigation pursuant to this
Section 5.8 shall affect or be deemed to modify any representation or
warranty made by, or the conditions to the obligations to consummate
this Agreement of, the other party hereto.
(b) Information Provided to Any Governmental Body or Agency.
It will, upon request, furnish the other party with all information
concerning it, its subsidiaries, directors, officers, partners and
shareholders and such other matters as may be reasonably necessary or
advisable in connection with the Proxy Statement/Prospectus, the
Registration Statement or any other statement or application made by or
on behalf of Cornerstone, ERB, Bank of East Ridge or any of their
respective subsidiaries to any governmental body or agency in
connection with or material to the Merger and the other transactions
contemplated by this Agreement.
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(c) Prohibited Use and Confidentiality of Information. It will
not use any information obtained pursuant to this Section 5.8 for any
purpose unrelated to the consummation of the transactions contemplated
by this Agreement and, if the transaction contemplated by this
Agreement is not consummated, it will hold all information and
documents obtained pursuant to this Section 5.8 in confidence unless
and until such time as such information or documents otherwise become
publicly available or as it is advised by counsel that any such
information or document is required by law to be disclosed, and in the
event of the termination of this Agreement, it will deliver to the
other party hereto all documents so obtained by it and any copies
thereof.
5.9 Information Disclosure: Prohibition. It shall not solicit or
knowingly encourage inquiries or proposals with respect to, or furnish any
information relating to or participate in any negotiations or discussions
concerning, any acquisition or purchase of all or a material portion of its
assets (whether owned by it directly or owned by any of its subsidiaries), or of
a substantial equity interest in it or any business combination with it or any
of its subsidiaries other than as contemplated by this Agreement, and it shall
instruct its officers, directors, agents, advisors and affiliates to comply with
the above. ERB agrees that it shall notify Cornerstone immediately if any
inquiries or proposals as described in this Section 5.9 are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated with, ERB or Bank of East Ridge.
5.10 Material Adverse Effect. It shall notify the other party hereto as
promptly as practicable of (a) any breach of any of its representations,
warranties or agreements contained herein that could have a Material Adverse
Effect and as to representations, warranties or agreements contained herein
which do not specifically refer to Material Adverse Effect, of any material
breach thereof, and (b) any change in its condition (financial or otherwise),
properties, business, results of operations or prospects (in its marketplace or
with respect to its existing customers) that could have a Material Adverse
Effect.
5.11 Filings, etc. It shall cooperate and use its best efforts to
promptly prepare and file all necessary documentation, to effect all necessary
applications, notices, petitions, filings and other documents, and to obtain all
necessary permits, consents, approvals and authorizations of all third parties
and governmental bodies or agencies, including submission of applications for
approval of this Agreement and the transactions contemplated hereby to the TDFI
and the FDIC in accordance with the provisions of the Bank Merger Act and T.C.A.
ss.45-2-1301 et seq., and to such other regulatory agencies as required by law.
5.12 Information Submitted to Third Parties. It shall (a) permit the
other to review in advance and, to the extent practicable, will consult with the
other party on all characterizations of the information relating to the other
party and any of its respective subsidiaries, which appear in any filing made
with, or written materials submitted to, any third party or any governmental
body or agency in connection with the transactions contemplated by this
Agreement; and (b) consult with the other with respect to obtaining all
necessary permits, consents, approvals and authorizations of all third parties
and governmental bodies or agencies necessary or advisable to consummate the
transactions contemplated by this Agreement and will keep the other party
apprised of the status of matters relating to completion of the transactions
contemplated herein.
5.13 Policies and Practices: Conformity. At or immediately prior to the
Closing, ERB shall, consistent with generally accepted accounting principles,
modify and change its and the Bank of East Ridge's loan, litigation and real
estate valuation policies and practices (including loan classifications and
levels of reserves) so as to be applied consistently on a mutually satisfactory
basis with those of Cornerstone; provided, however, that ERB shall not be
obligated to take any such action pursuant to this Section 5.13 unless and until
Cornerstone certifies that all conditions to its obligation to consummate the
Merger have been satisfied.
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5.14 Reasonable Dispatch. It shall not take or agree or commit to take
any action which would cause it to be unable to consummate the Merger with
reasonable dispatch, unless such action, agreement or commitment is otherwise
required by law, rules or regulations.
5.15 Regulatory Approval. It shall not take any action unless otherwise
required by law, rules or regulations, that would materially adversely affect
the ability of either party or any of its subsidiaries to obtain any necessary
approval of regulatory authorities required for the consummation of the Merger
without imposition of a condition or restriction of the type referred to in
Sections 6.1(b) and (c).
ARTICLE VI
CONDITIONS TO CONSUMMATION
6.1 Conditions. The respective obligations of Cornerstone, ERB and Bank
of East Ridge to effect the Merger shall be subject to the satisfaction prior to
the Effective Time of the following conditions:
(a) this Agreement, the Merger and the transactions
contemplated hereby shall have been approved by the requisite vote of
the shareholders in accordance with applicable law;
(b) the procurement of approval of this Agreement and the
transactions contemplated hereby by the TDFI and the FDIC, and the
expiration of any statutory waiting periods;
(c) procurement of all other regulatory consents and approvals
(including, without limitation, any required consents or approvals from
state banking authorities) which are necessary to the consummation of
the transactions contemplated by this Agreement; provided, however,
that no approval or consent in Sections 6.1(b) and (c) shall be deemed
to have been received if it shall include any conditions or
requirements which would reduce the benefits of the transactions
contemplated hereby to such a degree that Cornerstone or ERB (as to any
condition or requirement which directly adversely affects the
shareholders of ERB) would not have entered into this Agreement had
such conditions or requirements been known at the date hereof;
(d) the satisfaction of all other requirements prescribed by
law which are necessary to the consumma tion of the transactions
contemplated by this Agreement;
(e) no party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins
or prohibits the consummation of the Merger;
(f) no statute, rule, regulation, order, injunction or decree
shall have been enacted, entered, promul gated or enforced by any
governmental authority which prohibits, restricts or makes illegal
consummation of the Merger or which imposes restrictions, conditions or
requirements on consummation of the Merger which would reduce the
benefits of the Merger to such a degree that Cornerstone or ERB (as to
any restriction, condition or requirement which directly adversely
affects the shareholders of ERB) would not have entered into this
Agreement had such conditions or requirements been known at the date
hereof;
(g) the Registration Statement shall have become effective and
no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose
shall have been initiated or threatened by the SEC;
(h) the receipt of all state securities laws and "Blue Sky"
permits and other authorizations necessary to consummate the
transactions contemplated hereby; and
(i) the Effective Date of the Merger shall have occurred on or
before December 31, 1997.
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6.2 Additional Conditions. The obligation of Cornerstone to effect the
Merger shall be subject to the satisfaction prior to the Effective Time of the
following additional conditions:
(a) Cornerstone and its directors and officers shall have
received from ERB's and the Bank of East Ridge's independent certified
public accountants "cold comfort" letters, dated (i) the date of the
mailing of the Proxy Statement/Prospectus to ERB's shareholders and
(ii) shortly prior to the Effective Date, with respect to certain
financial information regarding ERB and Bank of East Ridge in the form
customarily issued by such accountants at such time in transactions of
this type;
(b) Cornerstone shall have received an opinion, dated the
Effective Date, of ERB's, Bank of East Ridge's and Young's counsel
substantially in the form of Exhibit "F" attached hereto;
(c) Each of the representations, warranties and covenants
contained herein of ERB, Bank of East Ridge, and Young, subject to the
disclosure letter of Cornerstone provided pursuant to Article III
shall, in all respects, be true on, or complied with by, the Effective
Date as if made on such date (or on the date when made in the case of
any representation or warranty which specifically relates to an earlier
date) except (y) for breaches which singly or in the aggregate would
not have a Material Adverse Effect and (z) as to representations,
warranties or covenants contained herein of ERB, Bank of East Ridge,
and Young which do not specifically refer to Material Adverse Effect,
for breaches which are not material and ERB shall have received a
certificate signed by the Chief Executive Officer or Chief Financial
Officer of ERB dated the Effective Date, to such effect;
(d) No litigation or proceeding is pending which (i) has been
brought against Cornerstone or ERB or any of their subsidiaries by any
governmental agency seeking to prevent consummation of the transactions
contemplated hereby or (ii) in the reasonable judgement of the Chief
Executive Officer of Cornerstone is likely to have a Material Adverse
Effect on ERB;
(e) Cornerstone shall have conducted a due diligence review of
ERB, the results of which shall be satisfactory to the Board of
Directors of Cornerstone;
(f) The ERB shareholders shall have elected to exchange ERB
Common Stock for cash of no less than $2,900,000;
(g) Cornerstone, at its option, shall have received a letter
from Mercer Capital, or another firm acceptable to Cornerstone, within
ten (10) days prior to the Effective Date, to the effect that in the
opinion of such firm, the terms of the transaction are fair to the
shareholders of Cornerstone from a financial point of view; and
(h) ERB shall have entered into a consulting agreement with
Young, dated the Effective Date, substantially in the form of Exhibit
"H" attached hereto.
Any effect on ERB and the Bank of East Ridge as a result of action taken by ERB
and the Bank of East Ridge pursuant to Section 5.13 shall be disregarded for
purposes of determining the truth or correctness of any representation or
warranty of ERB and Bank of East Ridge and for purposes of determining whether
any conditions are satisfied and shall not affect the Exchange Ratio.
6.3 Additional Conditions. The obligation of ERB and Bank of East Ridge
to effect the Merger shall be subject to the satisfaction at or prior to the
Effective Time of the following additional conditions:
(a) ERB and Bank of East Ridge and their directors and
officers shall have received from Cornerstone's independent certified
public accountants "cold comfort" letters, dated (i) the date of the
mailing of the Proxy Statement/Prospectus to Cornerstone's shareholders
and (ii) shortly prior to the Effective Date,
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with respect to certain financial information regarding Cornerstone in
the form customarily issued by such accountants at such time in
transactions of this type;
(b) ERB and Bank of East Ridge shall have received an opinion,
dated the Effective Date, of Cornerstone's counsel substantially in the
form of Exhibit "I" attached hereto;
(c) ERB and Bank of East Ridge shall have received an opinion
regarding certain tax issues, dated the Effective Date, of
Cornerstone's counsel substantially in the form of Exhibit "J" attached
hereto;
(d) ERB and Bank of East Ridge shall have received a letter
from a firm acceptable to ERB and Bank of East Ridge, to be included in
the proxy statement to be sent to the ERB shareholders and updated
within ten (10) days prior to the Effective Date, to the effect that in
the opinion of such firm, the terms of the transaction are fair to the
shareholders of ERB from a financial point of view;
(e) each of the representations, warranties and covenants
contained herein of Cornerstone, subject to the disclosure letter of
Cornerstone provided pursuant to Article III shall, in all respects, be
true on, or complied with by, the Effective Date as if made on such
date (or on the date when made in the case of any representation or
warranty which specifically relates to an earlier date) except (y) for
breaches which singly or in the aggregate would not have a Material
Adverse Effect and (z) as to representations, warranties or covenants
contained herein of Cornerstone which do not specifically refer to
Material Adverse Effect, for breaches which are not material and ERB
shall have received a certificate signed by the Chief Executive Officer
or Chief Financial Officer of Cornerstone, dated the Effective Date, to
such effect; and
(f) no litigation or proceeding is pending which (i) has been
brought against ERB or Cornerstone or any of their subsidiaries by any
governmental agency, seeking to prevent consummation of the
transactions contemplated hereby or (ii) in the reasonable judgment of
the Chief Executive Officer of ERB will have a Material Adverse Effect
on Cornerstone; and
(g) ERB shall have conducted a due diligence review of
Cornerstone, the results of which shall be satisfactory to the Board of
Directors of ERB.
ARTICLE VII
TERMINATION
This Agreement will be terminated as set forth in Section 7.2(a) and
this Agreement may be terminated prior to the Effective Date, either before or
after its approval by the shareholders of Cornerstone and ERB:
7.1 Mutual Majority Vote. By the mutual consent of Cornerstone and ERB,
if the Board of Directors of each so determines by vote of a majority of the
members of its entire Board.
7.2 Nonapproval of Agreement by Shareholders.
(a) In the event of the failure of the shareholders of either
Cornerstone or ERB to approve this Agreement by the requisite vote at
their respective meetings called to consider such approval, this
Agreement shall terminate automatically; or
(b) By Cornerstone or ERB, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in
the event of a breach by the other party hereto of any representation,
warranty or agreement contained herein which is not cured or not
curable within sixty (60) days after written notice of such breach is
given to the party committing such breach by the other party hereto
which has or will have had a Material Adverse Effect on the breaching
party.
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7.3 Post-Termination Liability. Subject to the provisions of Section
9.2, in the event of the termination of this Agreement by either Cornerstone or
ERB, as provided above, this Agreement shall thereafter become void and there
shall be no liability on the part of any party hereto under this Agreement or
their respective officers or directors, except that any such termination shall
be without prejudice to the rights of any party hereto arising out of the
willful breach by any other party of any covenant or willful misrepresentation
contained in this Agreement.
ARTICLE VIII
EFFECTIVE DATE AND EFFECTIVE TIME
On the last business day of the month during which the expiration of
all applicable waiting periods in connection with governmental approvals occurs
and all conditions to the consummation of this Agreement are satisfied or
waived, or on such earlier or later date as may be agreed by the parties, a
certificate of merger shall be executed in accordance with all appropriate legal
requirements and shall be filed as required by law, and the Merger provided for
herein shall become effective upon such filing or on such date as may be
specified in such certificate of merger. The date of such filing or such later
effective date is herein called the "Effective Date". The "Effective Time" of
the Merger shall be 5:01 P.M. Eastern Time on the Effective Date (or such other
time on the Effective Date as may be agreed upon by the parties).
ARTICLE IX
OTHER MATTERS
9.1 Certain Definitions. As used in this Agreement, the following terms
shall have the meanings indicated except where otherwise specifically defined:
(a) "Material Adverse Effect," with respect to a person, means
any condition, event, change or occurrence that, individually or
collectively, is reasonably likely to have a material adverse effect
upon (x) the condition, financial or otherwise, properties, business,
results of operations or prospects (in its marketplace or with respect
to its existing customers) of such person and its subsidiaries, taken
as a whole, except as may have resulted or may result from changes to
laws of the United States or regulations of federal bank or bank
holding company regulators or changes in national economic conditions
applicable to banking institutions generally or in national general
levels of interest rates that affect it and its subsidiaries, taken as
a whole, or (y) the ability of such person to perform its obligations
under, and to consummate the transactions contemplated by, this
Agreement; provided, however, that as to the representations and
warranties in Sections 3.21(a), (b), (c) and (d), a Material Adverse
Effect shall have occurred if the reasonably projected costs of
remediation and/or the cost of all fines, penalties, costs or expenses
to which the person is or may be subject under Environmental Laws as a
result of any one or more breaches of such representations and
warranties exceed $25,000 in the aggregate calculated on a pre-tax
basis and as to all other representations, warranties and covenants, a
Material Adverse Effect shall have occurred if the actual or reasonably
projected costs of all losses, fines, penalties, costs or expenses
(including attorneys' fees) as a result of any one or more breaches of
such representations, warranties and covenants exceed $50,000 in the
aggregate calculated on a pre-tax basis.
(b) "Person" includes an individual, corporation, partnership,
limited liability company, association, trust or unincorporated
organization.
9.2 Survival. The agreements and covenants of the parties which by
their terms apply in whole or in part after the Effective Time shall survive the
Effective Date. All other representations, warranties, agreements and covenants
shall be deemed to be conditions of this Agreement and shall not survive the
Effective Date. If this Agreement shall be terminated, the agreements of the
parties in Section 5.8(c), in Section 5.14 and Sections 9.6 and 9.7 shall
survive such termination.
9.3 Amendment; Modification; Waiver. Prior to the Effective Date, any
provision of this Agreement may be (i) waived by the party benefitted by the
provision or by both parties or (ii) amended or modified at any time
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(including the structure of the transaction) by an agreement in writing between
the parties hereto and approved by its Boards of Directors (to the extent
allowed by law), except that, after the vote by the shareholders of ERB and
Cornerstone, Section 1.2 shall not be amended or revised.
9.4 Counterparts. This Agreement may be executed in counterparts each
of which shall be deemed to constitute an original, but all of which together
shall constitute one and the same instrument.
9.5 Governing Law. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the State of Tennessee.
9.6 Expenses. Each party hereto will bear all expenses incurred by it
in connection with this Agreement and the transactions contemplated hereby
including fees and expenses of its own brokers, finders, financial consultants,
accountants and counsel ("Transaction Expenses"), except that (a) the filing fee
and expenses incurred in connection with the filing of the Registration
Statement with the SEC and (b) the expenses incurred in connection with printing
and mailing the Proxy Settlement/Prospectus shall be shared equally between ERB
and Cornerstone. ERB agrees that its Transaction Expenses will not exceed
$125,000.
9.7 Disclosure. Each of the parties and its respective agents,
attorneys and accountants will maintain the confidentiality of all information
provided in connection herewith which has not been publicly disclosed as
permitted under Section 5.6 unless it is advised by counsel that any such
information is required by law to be disclosed.
9.8 Notices. All notices, requests, acknowledgements and other
communications hereunder to a party shall be in writing and shall be deemed to
have been duly given when delivered by hand, telecopy (confirmed by overnight
courier delivery of original document), telegram or telex (confirmed in writing)
to such party at its address set forth below or such other address as such party
may specify by notice to the other party hereto.
IF TO ERB, East Ridge Bancshares, Inc.
BANK OF EAST RIDGE c/o Bank of East Ridge
AND YOUNG TO: 4154 Ringgold Road
Chattanooga, Tennessee 37412-0416
ATTN: David E. Young, Chief Executive Officer
Telecopy No.: 423-698-2468
With Copies to: Miller & Martin
Suite 2325, SunTrust Financial Center
424 Church Street
Nashville, Tennessee 37219
ATTN: Kathryn R. Edge
Telecopy No.: 615-244-1423
IF TO CORNERSTONE CORNERSTONE COMMUNITY BANK
TO: 5319 Highway 153
Chattanooga, Tennessee 37343
ATTN: Timothy L. Hobbs, President
Telecopy No.: 423-877-8923
With Copies to: BAKER, DONELSON, BEARMAN & CALDWELL
2200 Riverview Tower, 900 S. Gay Street
Knoxville, Tennessee 37902
ATTN: Colman B. Hoffman
Telecopy No.: 423-525-8569
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9.9 No Third-Party Beneficiaries. All terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Except as expressly provided
for herein, nothing in this Agreement is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Agreement.
9.10 Entire Agreement. This Agreement represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore made, including the Stock Purchase Agreement between Cornerstone
Community Bank and David E. Young dated February 12, 1997.
9.11 Assignment. This Agreement may not be assigned by any party hereto
without the written consent of the other parties.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed in counterparts by their duly authorized officers as of the day and
year first above written.
CORNERSTONE COMMUNITY BANK
/s/ Timothy L. Hobbs
EAST RIDGE BANCSHARES, INC.
/s/ James D. Renegar
THE BANK OF EAST RIDGE
/s/ David E. Young
/s/ David E. Young
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APPENDIX B
Mercer Capital Management, Inc.
5860 Ridgeway Center Parkway, Suite 410
Memphis, Tennessee 38120
April 25, 1997
The Board of Directors
Cornerstone Community Bank
5319 Highway 153
Chattanooga, Tennessee 37343
Re: Re: Fairness Opinion Regarding the Proposed Merger involving Cornerstone
Community Bank, East Ridge Bancshares, Inc., The Bank of East Ridge, and David
E. Young
Dear Directors:
Mercer Capital Management, Inc. ("Mercer Capital") has been retained by
the Board of Directors of Cornerstone Community Bank ("Cornerstone") to issue a
fairness opinion for the proposed merger between Cornerstone and East Ridge
Bancshares, Inc. ("ERB"). The fairness opinion is issued from a financial point
of view from the perspective of Cornerstone shareholders.
Under the terms of the Agreement and Plan of Merger by and between
Cornerstone Community Bank, East Ridge Bancshares, The Bank of East Ridge and
David E. Young, Individually, dated March 18, 1997, the following will occur
upon consummation of the merger:
- - Cornerstone will merge into the Bank of East Ridge with the Bank of
East Ridge as the surviving corporation. At closing, the Bank of East
Ridge will amend and restate its charter to change its name to
Cornerstone Community Bank.
- - ERB will amend its charter to adapt bylaws substantially similar to
those currently in effect for Cornerstone, increase its authorized
shares to 1,500,000, reduce the par value from $10.00 per share to
$1.00 per share, change the name of ERB, and include other provisions
satisfactory to Cornerstone. The individuals serving on the board of
directors of Cornerstone prior to the merger will comprise the board of
directors of ERB and the Bank of East Ridge subsequent to the merger.
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- - Cornerstone shareholders will receive one share of ERB common stock for
each share of Cornerstone common stock. In addition, Cornerstone
shareholders will receive a warrant to purchase additional ERB common
stock for $12.00 per share if exercised by February 8, 1998 and $15.00
per share if exercised by February 8, 2001 to replace warrants
Cornerstone shareholders now hold. It is anticipated that Cornerstone
shareholders will exercise approximately 180 thousand of such warrants
at closing to increase ERB's capital by about $2.2 million.
- - Based upon arm's length negotiations, ERB shareholders will receive a
total consideration of $6,125,000, payable in cash of $56.18 per
existing ERB share, or "new" ERB stock based upon the conversion ratio
of $56.18 divided by $12.00 per each share of existing ERB share. A
condition of the merger is that ERB shareholders owning at least 76,321
shares (70%) elect the cash option. If ERB shareholders elect to
receive cash greater than 70%, then the proceeds will be reduced on a
pro rata basis with balance payable in the form of new ERB common
stock. In the event that ERB shareholders elect to receive less than
70% cash, then Cornerstone may terminate the Agreement.
- - David E. Young, the Bank of East Ridge's chief executive officer and
largest shareholder with a 69.8% interest in ERB, has agreed to
exchange for cash at least 70% of the shares he owns.
- - David E. Young has also agreed to be bound by a five year non-compete
for which he will receive consideration of $75,000 annually. In
addition, change-of-control benefits totaling up to approximately
$300,000 may be paid to three Bank of East Ridge officers under certain
conditions.
The proposed purchase price for ERB's common shares is $6,125,000, or 12.6x
ERB's reported 1996 net income and 200% of book value as of December 31, 1996.
Based upon a discount rate of 7%, the present value of the after-tax payments
which will be made to Mr. Young is about $191,000. In addition, employment
agreement payments may be incurred for three officers, if they elect to
terminate their relationship with The Bank of East Ridge within 30 days of the
consummation of the merger. The after-tax liability of the payments approximates
$189,000.
As part of the engagement, a representative of Mercer Capital visited with
Cornerstone and ERB management in Chattanooga, Tennessee. Mercer Capital was not
asked to, and did not recommend the exchange ratio between ERB and Cornerstone
common stocks and did not assist in the merger negotiations. Factors considered
in rendering the opinion include:
1. Terms of the Agreement;
2. An analysis of the reasonableness of the proposed
consideration which will be paid to ERB shareholders;
3. An analysis of the estimated pro-forma changes in the combined
entities' balance sheet and income statement, book value per
share, earnings per share, and dividends per share from the
perspective of the Cornerstone shareholders;
4. The tax-free nature of the transaction for Cornerstone
shareholders; and,
5. Consideration of the ability of the merger to advance
Cornerstone's business plan;
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Mercer Capital did not compile nor audit Cornerstone's or ERB's financial
statements, nor have we independently verified the information reviewed. We have
relied upon such information as being complete and accurate in all material
respects. We have not made an independent evaluation of the loan portfolio or
the adequacy of the loan loss reserve, nor have we made specific evaluations of
other assets or liabilities of either institution.
Our opinion does not constitute a recommendation to any shareholder as to how
the shareholder should vote on the proposed merger. Mercer Capital has not
expressed an opinion as to the prices at which any security of Cornerstone or
ERB might trade in the future.
Based upon our analysis of the proposed transaction, it is our opinion that the
transaction is fair to Cornerstone's stockholders from a financial point of
view.
Sincerely yours,
MERCER CAPITAL MANAGEMENT, INC.
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APPENDIX C
WEST'S TENNESSEE CODE
TITLE 48. CORPORATIONS AND ASSOCIATIONS
CHAPTER 23. BUSINESS CORPORATIONS--DISSENTERS' RIGHTS
PART 1--RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
48-23-101. Definitions. -- As used in this chapter, unless the context otherwise
requires:
(1) "Beneficial shareholder" means the person who is a beneficial owner
of shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 48-23-102 and who exercises that right when and in
the manner required by part 2 of this chapter;
(4) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the corporate
action that gave rise to the shareholder's right to dissent until the date of
payment, at the average auction rate paid on United States treasury bills with a
maturity of six (6) months (or the closest maturity thereto) as of the auction
date for such treasury bills closest to such effective date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
48-23-102. Right to dissent. -- (a) A shareholder is entitled to dissent from,
and obtain payment of the fair value of the shareholder's shares in the event
of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a party:
(A) If shareholder approval is required for the merger by ss.
48-21-104 or the charter and the shareholder is entitled to vote on the
merger; or
(B) If the corporation is a subsidiary that is merged with its
parent under ss. 48-21-105;
(2) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
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including a sale in dissolution, but not including a sale pursuant to court
Forder or a sale for cash pursuant to a plan by which all or substantially all
of the net proceeds of the sale will be distributed to the shareholders within
one (1) year after the date of sale;
(4) An amendment of the charter that materially and adversely affects
rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights; or
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share, if the fractional share is to be acquired for cash under
ss. 48-16-104; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the charter, bylaws, or a resolution of the board of directors provides
that voting or nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder may
dissent as to any shares of a security which, as of the date of the effectuation
of the transaction which would otherwise give rise to dissenters' rights, is
listed on an exchange registered under ss. 6 of the Securities Exchange Act of
1934, as amended, or is a "national market system security," as defined in rules
promulgated pursuant to the Securities Exchange Act of 1934, as amended.
48-23-103. Dissent by nominees and beneficial owners. -- (a) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the record shareholder's name only if the record shareholder
dissents with respect to all shares beneficially owned by any one (1) person and
notifies the corporation in writing of the name and address of each person on
whose behalf the record shareholder asserts dissenters' rights. The rights of a
partial dissenter under this subsection are determined as if the shares as to
which the partial dissenter dissents and the partial dissenter's other shares
were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
of any one (1) or more classes held on the beneficial shareholder's behalf only
if the beneficial shareholder:
(1) Submits to the corporation the record shareholder's written consent
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
(2) Does so with respect to all shares of the same class of which the
person is the beneficial shareholder or over which the person has power to
direct the vote.
PART 2--PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
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48-23-201. Notice of dissenters' rights. -- (a) If proposed corporate action
creating dissenters' rights under ss. 48-23-102 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under this chapter and be
accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under ss. 48-23-102
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in ss. 48-23-203.
(c) A corporation's failure to give notice pursuant to this section will
not invalidate the corporate action.
48-23-202. Notice of intent to demand payment. -- (a) If proposed corporate
action creating dissenters' rights under ss. 48- 23-102 is submitted to a vote
at a shareholders' meeting, a shareholder who wishes to assert dissenters'
rights must:
(1) Deliver to the corporation, before the vote is taken, written notice
of the shareholder's intent to demand payment for the shareholder's shares if
the proposed action is effectuated; and
(2) Not vote the shareholder's shares in favor of the proposed action. No
such written notice of intent to demand payment is required of any shareholder
to whom the corporation failed to provide the notice required by ss. 48-23-201.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for the shareholder's shares under this chapter.
48-23-203. Dissenters' notice. -- (a) If proposed corporate action creating
dissenters' rights under ss. 48-23-102 is authorized at a shareholders' meeting,
the corporation shall deliver a written dissenters' notice to all shareholders
who satisfied the requirements of ss. 48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days after
the corporate action was authorized by the shareholders or effectuated,
whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the principal terms of
the proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not the person asserting dissenters' rights acquired
beneficial ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than one (1) nor more than two (2) months after the
date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter if the corporation has not
previously sent a copy of this chapter to the shareholder pursuant to ss.
48-23-201.
48-23-204. Duty to demand payment. -- (a) A shareholder sent a dissenters'
notice described in ss. 48-23-203 must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date required
to be set forth in the dissenters' notice pursuant to ss. 48-23-203(b)(3), and
deposit the shareholder's certificates in
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accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (a) retains all other rights of a
shareholder until these rights are cancelled or modified by the effectuation of
the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
(d) A demand for payment filed by a shareholder may not be withdrawn
unless the corporation with which it was filed, or the surviving corporation,
consents thereto.
48-23-205. Share restrictions. -- (a) The corporation may restrict the transfer
of uncertificated shares from the date the demand for their payment is received
until the proposed corporate action is effectuated or the restrictions released
under ss. 48-23-207.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the effectuation of the proposed corporate
action.
48-23-206. Payment. -- (a) Except as provided in ss. 48-23-208, as soon as the
proposed corporate action is effectuated, or upon receipt of a payment demand,
whichever is later, the corporation shall pay each dissenter who complied with
ss. 48-23-204 the amount the corporation estimates to be the fair value of each
dissenter's shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen (16) months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under ss.
48-23-209; and
(5) A copy of this chapter if the corporation has not previously sent a
copy of this chapter to the shareholder pursuant to ss. 48-23-201 or ss.
48-23-203.
48-23-207. Failure to take action. -- (a) If the corporation does not effectuate
the proposed action that gave rise to the dissenters' rights within two (2)
months after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation effectuates the proposed action, it must send a
new dissenters' notice under ss. 48-23-203 and repeat the payment demand
procedure.
48-23-208. After-acquired shares. -- (a) A corporation may elect to withhold
payment required by ss. 48-23-206 from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the principal terms of the proposed
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corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of the
dissenter's demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under ss.
48-23-209.
48-23-209. Procedure if shareholder dissatisfied with payment or offer. -- (a) A
dissenter may notify the corporation in writing of the dissenter's own estimate
of the fair value of the dissenter's shares and amount of interest due, and
demand payment of the dissenter's estimate (less any payment under ss.
48-23-206), or reject the corporation's offer under ss. 48-23-208 and demand
payment of the fair value of the dissenter's shares and interest due, if:
(1) The dissenter believes that the amount paid under ss. 48-23-206 or
offered under ss. 48-23-208 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under ss. 48-23-206 within two
(2) months after the date set for demanding payment; or
(3) The corporation, having failed to effectuate the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within two (2) months after the date set for
demanding payment.
(b) A dissenter waives the dissenter's right to demand payment under this
section unless the dissenter notifies the corporation of the dissenter's demand
in writing under subsection (a) within one (1) month after the corporation made
or offered payment for the dissenter's shares.
PART 3--JUDICIAL APPRAISAL OF SHARES
48-23-301. Court action. -- (a) If a demand for payment under ss. 48-23-209
remains unsettled, the corporation shall commence a proceeding within two (2)
months after receiving the payment demand and petition the court to determine
the fair value of the shares and accrued interest. If the corporation does not
commence the proceeding within the two-month period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the corporation's principal
office (or, if none in this state, its registered office) is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
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(e) Each dissenter made a party to the proceeding is entitled to judgment:
(1) For the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus accrued interest, exceeds the amount paid by the
corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under ss. 48-23-208.
48-23-302. Court costs and counsel fees. -- (a) The court in an appraisal
proceeding commenced under ss. 48-23-301 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under ss. 48-23-209.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable against:
(1) The corporation and in favor of any or all dissenters if the court
finds the corporation did not substantially comply with the requirements of part
2 of this chapter; or
(2) Either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted arbitrarily, vexatiously, or not in good faith with respect to the rights
provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefited.
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APPENDIX D
AMENDED AND RESTATED CHARTER
OF
NEW CORNERSTONE
Pursuant to the Tennessee Business Corporation Act, the undersigned
corporation hereby adopts the following as its Charter:
1. The name of the Corporation is Cornerstone Bancshares, Inc.
2. The authorized amount of common voting stock of this Bank
shall be one million five hundred thousand (1,500,000) shares of Common Stock,
$1.00 par value, that have unlimited voting rights and that are entitled to
receive the net assets of the Corporation upon dissolution.
The authorized amount of preferred stock of the Corporation shall be
one million five hundred thousand (1,500,000) shares, but said preferred stock
may be increased or decreased from time to time in accordance with the
provisions of the laws of Tennessee. Except as otherwise limited by law, the
Board of Directors shall be empowered to issue such stock in one or more series,
and with such rights and preferences and upon such terms, including
convertibility, as the Board shall determine.
3. The street address of the registered office of the Corporation
shall be 5319 Highway 153 Chattanooga, Tennessee 37343. The name of the
Corporation's initial registered agent at its registered office is Timothy L.
Hobbs.
4. The address of the principal office of the Corporation is 5319
Highway 153 Chattanooga, Tennessee 37343.
5. The Corporation is a for profit corporation.
6. The Corporation shall have and exercise all of the powers and
rights conferred by the Tennessee Business Corporation Act as amended from time
to time or any successor provisions thereto.
7. The business and affairs of the Corporation shall be managed
by a Board of Directors, not less than five (5) nor more than twenty-five (25),
the number to be fixed by the Bylaws. Bylaws shall be adopted and may be amended
by a vote of the holders of a majority of the outstanding voting shares voted at
the meeting of the shareholders, but the Bylaws may provide for amendment by the
Board of Directors of any provision other than those relating to the duties,
term of office or indemnification of a Director.
8. a. To the fullest extent that the Tennessee Business
Corporation Act as it exists on the date hereof or as
it may hereafter be amended permits the limitation or
elimination of the liability of Directors, a Director
of the Corporation shall not be personally liable to
the Corporation or its shareholders for monetary
damages for a breach of fiduciary duty as a Director,
except for liability (i) for any breach of the
Director's duty of loyalty to the Corporation or its
shareholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a
knowing violation of law, or (iii) under Section
48-18-304 of the Tennessee Business Corporation Act,
as the same exists or hereafter may be amended. If
the Tennessee Business Corporation Act is amended
after approval by the shareholders of this provision
to authorize corporate action further eliminating or
limiting the personal liability of Directors, the
liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted
by the Tennessee Business Corporation Act, as so
amended from time to time. Any repeal or modification
of this paragraph by the shareholders of the
Corporation shall be prospective only, and shall not
adversely affect any limitation on the
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personal liability of a Director of the Corporation
existing at the time of such repeal or modification.
b. The Corporation shall have the power to indemnify any
Director, officer, employee, agent of the
Corporation, or any other person who is serving at
the request of the Corporation in any such capacity
with another corporation, partnership, joint venture,
trust, or other enterprise (including, without
limitation, any employee benefit plan) to the fullest
extent permitted by the Tennessee Business
Corporation Act as it exists on the date hereof or as
it may hereafter be amended, and any such
indemnification may continue as to any person who has
ceased to be a Director, officer, employee, or agent
and may inure to the benefit of the heirs, executors,
and administrators of such a person.
c. By action of its Board of Directors, notwithstanding
any interest of the Directors in the action, the
Corporation may purchase and maintain insurance, in
such amounts as the Board of Directors deems
appropriate, to protect any Director, officer,
employee, or agent of the Corporation or any other
person who is serving at the request of the
Corporation in any such capacity with another
corporation, partnership, joint venture, trust, or
other enterprise (including, without limitation any
employee benefit plan) against any liability asserted
against him or incurred by him in any such capacity
or arising out of his status as such (including,
without limitation, expenses, judgments, fines, and
amounts paid in settlement) to the fullest extent
permitted by the Tennessee Business Corporation Act
as it exists on the date hereof or as it may
hereafter be amended, and whether or not the
Corporation would have the power or would be required
to indemnify such person under the terms of any
agreement or by-law or the Tennessee Business
Corporation Act. For purposes of this paragraph (c),
"fines" shall include any excise taxes assessed on a
person with respect to any employee benefit plan.
9. Notwithstanding anything contained in this Charter or the
By-Laws of the Corporation:
a. Beneficial Ownership Limitation. No person shall make
a control share acquisition by directly or indirectly
offering to acquire, or acquiring the beneficial
ownership of more than ten percent (10%) of any class
of any equity security of the Corporation. In the
event a control share acquisition is made in
violation of this Paragraph 9, all stock beneficially
owned by any person in excess of ten percent (10%)
shall be considered "excess stock" and shall not be
counted as stock entitled to vote and shall not be
voted by any person or counted as voting shares in
connection with any matters submitted to the
shareholders for a vote including any vote pursuant
to this Paragraph 9.
b. Definitions.
The following definitions apply:
(i) "CONTROL SHARES"
As used in this Paragraph, "Control Shares" means
shares that, except for this Paragraph, would have
voting power with respect to shares of the
Corporation that, when added to all other shares of
the Corporation owned by a person or in respect to
which that person may exercise or direct the exercise
of voting power, would entitle that person,
immediately after acquisition of the shares, directly
or indirectly, alone or as a part of a group, to
exercise or direct the exercise of the voting power
of the Corporation in the election of Directors in
excess of ten percent (10%) of all voting power.
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(ii) "CONTROL-SHARE ACQUISITION"
(a) As used in this Paragraph, "Control-Share
Acquisition" means the acquisition, directly
or indirectly, by any person of ownership
of, or the power to direct the exercise of
voting power with respect to, issued and
outstanding Control Shares.
(b) For purposes of this Paragraph, shares
acquired within ninety (90) days or shares
acquired pursuant to a plan to make a
Control-Share Acquisition are considered to
have been acquired in the same acquisition.
(c) For purposes of this Paragraph, a person who
acquires shares in the ordinary course of
business for the benefit of others in good
faith and not for the purpose of
circumventing this Paragraph has voting
power only of shares in respect of which
that person would be able to exercise or
direct the exercise of votes without further
instruction from others.
(d) The Acquisition of any shares of the
Corporation does not constitute a
Control-Share Acquisition if the acquisition
is consummated in any of the following
circumstances:
(i) Pursuant to the laws of descent and
distribution.
(ii) Pursuant to the satisfaction of a
pledge or other security interest
created in good faith and not for
the purpose of circumventing this
Article.
(iii) Pursuant to a merger or
consolidation if the Corporation is
a party to the agreement of merger
or consolidation.
(iv) Pursuant to any savings, employee
stock ownership, or other employee
benefit plan of the Corporation or
any of its subsidiaries or any
fiduciary with respect to any such
plan when acting in such fiduciary
capacity.
(e) The acquisition of shares of the Corporation
in good faith and not for the purpose of
circumventing this Paragraph by or from:
(i) Any person whose voting rights had
previously been authorized by
shareholders or Directors in
compliance with this Paragraph; or
(ii) Any person whose previous
acquisition of shares of the
Corporation would have constituted
a Control-Share Acquisition but for
subsection (D).
does not constitute a Control-Share
Acquisition, unless the acquisition entitles
any person, directly or indirectly, alone or
as part of a group, to exercise or direct
the exercise of voting power of the
Corporation in the election of Directors in
excess of the range of the voting power
otherwise authorized.
(iii) "INTERESTED SHARES"
As used in this Paragraph, "Interested Shares" means
the shares of the Corporation in respect of which an
acquiring person or member of a group with respect to
a Control-Share
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Acquisition may exercise or direct the exercise of
the voting power of the Corporation in the election
of Directors.
c. Notice of Control-Share Acquisition. Any person who
proposes to make or has made a Control-Share
Acquisition may at the person's election deliver an
acquiring person statement to the Corporation at the
Corporation's principal office. The acquiring person
statement must set forth all of the following:
(i) The identity of the acquiring person and each other
member of any group of which the person is a part for
purposes of determining Control Shares.
(ii) A statement that the acquiring person statement is
given pursuant to this Paragraph.
(iii) The number of shares of the Corporation owned,
directly or indirectly, by the acquiring person and
each other member of the group.
(iv) The range of voting power under which the
Control-Share Acquisition falls or would, if
consummated, fall.
(v) If the Control-Share Acquisition has not taken place:
(a) A description in reasonable detail of the
terms of the proposed Control-Share
Acquisition; and
(b) Representations of the acquiring person,
together with a statement, in reasonable
detail, of the facts upon which they are
based, that the proposed Control-Share
Acquisition, if consummated, will not be
contrary to law and that the acquiring
person has the financial capacity to make
the proposed Control-Share Acquisition.
d. Shareholder Meeting to Determine Control-Shares
Voting Rights.
(i) If the acquiring person so requests at the time of
delivery of an acquiring person statement and gives
an undertaking to pay the Corporation's expenses of a
special meeting, within ten (10) days thereafter, the
Directors of the Corporation or others authorized to
call such a meeting under the Corporation's By-Laws
shall call a special meeting of shareholders of the
Corporation for the purpose of considering the voting
rights to be accorded the shares acquired or to be
acquired in the Control-Share Acquisition.
(ii) Unless the acquiring person agrees in writing to
another date, the special meeting of shareholders
shall be held within fifty (50) days after receipt by
the Corporation of the request.
(iii) If the acquiring person so requests in writing at the
time of delivery of the acquiring person statement,
the special meeting must not be held sooner than
thirty (30) days after receipt by the Corporation of
the acquiring person statement.
(iv) If no request is made, the voting rights to be
accorded the shares acquired in the Control-Share
Acquisition shall be presented to the next special or
annual meeting of the shareholders.
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e. Notice of Shareholder Meeting.
(i) If a special meeting is requested, notice of the
special meeting of shareholders shall be given as
promptly as reasonably practicable by the Corporation
to all shareholders of record as of the record date
set for the meeting, whether or not entitled to vote
at the meeting.
(ii) Notice of the special meeting or annual shareholder
meeting at which the voting rights are to be
considered must include or be accompanied by both of
the following:
(a) A copy of the acquiring person statement
delivered to the Corporation pursuant to
this Paragraph.
(b) A statement by the Board of Directors of the
Corporation, authorized by its Directors, of
its position or recommendation, or that it
is taking no position or making no
recommendation, with respect to the proposed
Control-Share Acquisition.
f. Resolution Granting Control-Shares Voting Rights.
(i) Control Shares acquired in a Control-Share
Acquisition have voting rights as were accorded the
shares before the Control-Share Acquisition only to
the extent granted by resolution approved by a
majority of the shares other than the Interested
Shares or by the affirmative vote of seventy-five
percent (75%) of the Corporation's Board of Directors
excluding any Director who is proposing to make a
Control-Share Acquisition or who is a member of a
group making or proposing to make a Control-Share
Acquisition.
(ii) To be approved by the shareholders under this
subsection, the resolution must be approved by:
(a) Each class or series entitled to vote
separately on the proposal by a majority of
all the votes entitled to be cast by the
class or series with the holders of the
outstanding shares of a class or series
being entitled to vote as a separate class;
and
(b) Each class or series entitled to vote
separately on the proposal by a majority of
all the votes entitled to be cast by that
group, excluding all Interested Shares.
10. The date on which the original charter for the Corporation was
filed by the Secretary of State of Tennessee was .
11. This Amended and Restated Charter contains amendments to the
original charter of the Corporation which required shareholder approval. This
Amended and Restated Charter was duly adopted by a majority of the shareholders
of each class of outstanding stock of the Corporation at a meeting held on the
___ day of __________, 1997, and supersedes the Corporation's original Charter.
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RESTATED BYLAWS OF
NEW CORNERSTONE
ARTICLE 1.
OFFICES
Section a. The principal offices of this corporation are 5319
Highway 153, Chattanooga, Tennessee 37343. The said principal office may be
changed at any time by appropriate resolution of the Board of Directors. The
corporation may have offices and places of business at such other places within
or without the State of Tennessee as shall be determined by the Board of
Directors.
Section b. The registered office of the corporation for any
particular state may be, but need not be, identical with the principal office of
the corporation in that state, and the address of the registered office may be
changed from time to time by appropriate resolution of the Board of Directors.
ARTICLE 2.
SHAREHOLDERS
Section a. Meetings. All meetings of shareholders shall be held
either in the principal office of the corporation or at any other place within
or without the city of Chattanooga, Tennessee, as designated by the Board of
Directors.
Section b. Annual Meeting. A meeting of the shareholders shall
be held in the principal office of the corporation on the third Thursday in
April of each year for the purpose of electing directors and for the transaction
of any other business authorized to be transacted by the shareholders. If the
appointed day is a legal holiday the meeting shall be held at the same time on
the next succeeding day not a holiday. In the event that the annual meeting is
omitted by oversight or otherwise on the date herein provided for, the directors
shall cause a meeting in lieu thereof to be held as soon thereafter as
conveniently may be, and any business transacted or elections held at such
meeting shall be as valid as if transacted or held at the annual meeting. Such
subsequent meeting shall be called in the same manner as provided for the annual
shareholders meeting.
Section c. Special Meetings. Except as otherwise provided by
law, special meetings of the shareholders of this corporation shall be held at
such places and times as may be determined by the President or by one-third of
the Board of Directors, or whenever one or more shareholders who are entitled to
vote and who hold at least 20% of the common shares issued and outstanding shall
make written application therefor to the Secretary stating the time, place and
purpose of the meeting called for. No business shall be transacted at a special
meeting except as stated in the notice sent to the shareholders, unless by the
unanimous consent of the shareholders, either in person or by proxy, all such
stock being represented at the meeting.
Section d. Notice of Meetings. Notice of all shareholders'
meetings stating the time, place and the objects for which such meetings are
called shall be given by the President or the Vice President or the Secretary to
each shareholder of record not less than ten nor more than sixty days prior to
the date of the meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States Mail in a sealed envelope with postage
thereon prepaid, addressed to the shareholder at his address as it appears on
the stock record books of the corporation, unless he shall have filed with the
Secretary of the corporation a written request that notice intended for him be
mailed to some other address, in which case it shall be mailed to the address
designated in such request.
Any meeting of which all shareholders entitled to vote have waived or
at any time shall waive notice in writing shall be a legal meeting for the
transaction of business, notwithstanding that notice has not been given as
herein before provided.
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Section e. Notice of Right to Dissent. If shareholders are to
vote at a meeting on a corporate action which would give rise to a dissenter's
right to payment for his shares in accordance with the Tennessee Business
Corporation Act, notice of such meeting shall be given to every share holder who
will be entitled to dissent from such action and to receive payment for his
shares whether or not entitled to vote thereon. Such notice shall be given in
accordance with the provisions of Section 4 of this Article and shall also
contain a statement, displayed with reasonable prominence, that upon compliance
with the Tennessee Business Corporation Act, dissenting shareholders are
entitled to be paid the fair value of their shares as provided in said Act.
Section f. Closing of Transfer Books or Fixing of Record Date.
For the purpose of determining the shareholders entitled to notice of or to vote
at any meeting of shareholders or any adjournment thereof, or shareholders
entitled to receive payment of any dividend, or in order to make a determination
of shareholders for any other proper purpose, the Board of Directors of the
corporation may provide that the stock transfer book shall be closed for a
stated period not to exceed in any case sixty days. If the stock transfer book
shall be closed for the purpose of determining shareholders, such books shall be
closed for at least ten days immediately preceding such meeting. In lieu of
closing the stock transfer books, the Board of Directors may fix in advance a
date as the record date for any such determination of shareholders, such date in
any case to be not more than sixty days and, in case of a meeting of
shareholders, not less than ten days prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If the stock
transfer books are not closed and no record date is fixed for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders,
or shareholders entitled to receive payment of a dividend, the date on which
notice of the meeting is mailed or the date on which the resolution of the Board
of Directors declaring such dividend is adopted, as the case may be, shall be
the record date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this Section, such determination shall apply to any adjournment
thereof.
Section g. Voting Lists. The officer or agent having charge of
the stock transfer books for common shares of the corporation shall make, at
least ten days before each meeting of shareholders, a complete list of the
shareholders entitled to vote at such meeting or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each shareholder, which list, for a period of ten days prior to such
meeting shall be kept on file at the registered office of the corporation and
shall be subject to inspection by any shareholder at any time during usual
business hours. Such list shall be certified by the corporate officer
responsible for its preparation or by the transfer agent and shall be produced
and kept open at the time and place of the meeting and be subject to the
inspection of any shareholder during the entire time of the meeting. In the
event of any challenge to the right of any person to vote at the meeting, the
presiding officer at such meeting may rely on said list as proper evidence of
the right of parties to vote at such meeting.
Section h. Quorum. Except as may be otherwise provided by law, a
majority of the outstanding shares of the corporation entitled to vote,
represented in person or by proxy, shall constitute a quorum at a meeting of
shareholders. In the event that a majority of the outstanding shares are
represented at any meeting, a majority of the shares represented thereat
entitled to vote shall decide any question brought before such meeting, unless
the question is one upon which by express provision of law or of the certificate
of incorporation or of these bylaws a larger or different vote is required, in
which case such express provision shall govern and control the decision of each
question.
Section i. Proxies. Shareholders of record who are entitled to
vote may vote at any meeting either in person or by proxy in writing, which
shall be filed with the Secretary of the meeting before being voted. Such proxy
shall entitle the holders thereof to vote at any adjournment of such meeting,
but shall not be valid after the final adjournment thereof. No proxy shall be
valid after the expiration of eleven months from the date of its execution
unless the shareholder executing it shall have specified therein the length of
time it is to continue in force, which shall be for some limited period.
Section j. Voting of Shares. Except as otherwise provided in the
certificate of incorporation or these bylaws, each outstanding share entitled to
vote shall be entitled to one vote upon each matter submitted to a vote at a
meeting of shareholders.
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Shares standing in the name of another corporation may be voted by such
officer, agent or proxy as the bylaws of such corporation may prescribe, or in
the absence of such provision, as the Board of Directors of such corporation may
determine.
Shares held by an administrator, executor, guardian or conservator may
be voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer thereof into his name, if authority so to do be
contained in an appropriate order of the court by which such receiver was
appointed.
A shareholder whose shares may be pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to the corporation or held by it in a
fiduciary capacity shall not be voted, directly or indirectly, at any meeting
and shall not be counted in determining the total number of outstanding shares
at any given time.
Section k. Informal Action by Shareholders. Any action required
to be taken at a meeting of the shareholders, or any other action which may be
taken at a meeting of the shareholders, may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the shareholders entitled to vote with respect to the subject matter thereof.
ARTICLE 3.
BOARD OF DIRECTORS
Section a. Number, Tenure and Qualifications. The number of
Board of Directors of this corporation shall be fixed at nine (9). The Board of
Directors shall be chosen by ballot annually by the shareholders at their annual
meeting or at any meeting held in place thereof as provided by law. Each
director shall serve until the next annual meeting of the shareholders or until
his successor is duly elected and qualified. Directors shall be of full age and
citizens of the United States. Directors must be shareholders.
Section b. Powers of Directors. The Board of Directors shall
have the entire management of the business of the corporation. In the management
and control of the property, business and affairs of the corporation, the Board
of Directors is hereby vested with all the powers possessed by the corporation
itself, so far as this delegation of authority is not inconsistent with the laws
of the State of Tennessee, with the certificate of incorporation of the
corporation, or with these bylaws. The Board of Directors shall have the power
to determine what constitutes net earnings, profits, and surplus, respectively,
what amount shall be reserved for working capital and to establish reserves for
any other proper purpose, and what amount shall be declared as dividends, and
such determination by the Board of Directors shall be final and conclusive. The
Board of Directors shall have the power to declare dividends for and on behalf
of this corporation, which dividends may include or consist of stock dividends.
Section c. Regular Meetings of the Board. Immediately after
such annual election the newly elected directors may meet at the same place for
the purpose of organization, the election of corporate officers and the
transaction of other business; if a quorum of the directors be then present no
prior notice of such meeting shall be required. Other regular meetings of the
Board shall be held at such times and places as the Board by resolution may
determine and specify, and if so determined no notice thereof need be given,
provided that unless all the directors are present at the meeting at which said
resolution is passed, that the first meeting held pursuant to said resolution
shall not be held for at least two days following the date on which the
resolution is passed.
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Section d. Special Meetings. Special meetings of the Board of
Directors may be held at any time or place whenever called by the President, or
by written request of at least one-third of the directors, or any two (2)
executive officers, notice thereof being given to each director by the Secretary
or other officer calling the meeting, or they may be held at any time without
formal notice provided all of the directors are present or those not present
shall at any time waive or have waived notice thereof.
Section e. Notice. Notice of any special meetings shall be given
at least twenty-four hours previously thereto by written notice delivered
personally or by telegram or at least five days previously thereto by written
notice mailed to each director at his business address. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail so
addressed, with postage thereon prepaid. If notice be given by telegram, such
notice shall be deemed to be delivered when the telegram is delivered to the
telegraph company.
Section f. Quorum. A majority of the members of the Board of
Directors as constituted for the time being shall constitute a quorum for the
transaction of business, but a lesser number may adjourn any meeting and the
meeting may be held as adjourned without further notice. When a quorum is
present at any meeting, a majority of the members present thereat shall decide
any question brought before such meeting, except as otherwise provided by law or
by these bylaws. The fact that a director has an interest in a matter to be
voted on at the meeting shall not prevent his being counted for purposes of a
quorum.
Section g. Vacancies. Any vacancy occurring in the Board of
Directors, including vacancies by virtue of removal for cause, may be filled by
the vote of a majority of the remaining Directors.
Section h. Compensation. By resolution of the Board of
Directors, the directors may be paid their expenses, if any, of attendance at
each meeting of the Board of Directors, and may be paid a fixed sum for
attendance at each meeting of the Board of Directors or a stated salary as a
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
Section i. Removal. Any director may be removed without cause
by a majority vote of the shareholders. A director may be removed for cause by a
majority of the entire Board of Directors. Cause shall be defined as the final
conviction of a felony, declaration of unsound mind by court order, adjudication
of bankruptcy, nonacceptance of office or conduct prejudicial to the interest of
the corporation.
Section j. Committees. The majority of the Board of Directors
may appoint an executive committee, loan committee and investment committee or
such other committees as it may deem advisable, composed of two or more
directors, and may delegate authority to such committees as is not inconsistent
with the Tennessee Business Corporation Act. The members of such committee shall
serve at the pleasure of the Board of Directors.
Section k. Presumption of Assent. A director of the corporation
who is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action taken
unless his dissent shall be entered in the minutes of the meeting or unless he
shall file his written dissent to such action with the person acting as the
Secretary of the meeting before the adjournment thereof or shall forward such
dissent by registered mail to the Secretary of the corporation immediately after
the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
Section l. Informal Action by Directors. Any action required to
be taken at a meeting of the Board of Directors, or any other action which may
be taken at a meeting of the Board of Directors, may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors entitled to vote with respect to the subject matter
thereof.
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ARTICLE 4.
WAIVER OF NOTICE
Whenever any notice whatever is required to be given by these bylaws,
or the certificate of incorporation of this corporation, or any other
corporation laws of the State of Tennessee, a waiver thereof in writing signed
by the person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent thereto. Where the person or
persons entitled to such notice sign the minutes of any shareholder's or
directors meeting, which minutes contain the statement that said person or
persons have waived notice of the meeting, then such person or persons are
deemed to have waived notice in writing.
ARTICLE 5.
OFFICERS
Section a. Number. The officers of the corporation shall be a
Chairman of the Board, a President, one or more Vice Presidents (the number
thereof to be determined by the Board of Directors), a Secretary and a
Treasurer, each of whom shall be elected by the Board of Directors. Such other
officers and assistant officers as may be deemed necessary may be elected or
appointed by the Board of Directors. Any two or more offices may be held by the
same person, except the offices of President and Secretary.
Section b. Election and Term of Office. The officers of the
corporation to be elected by the Board of Directors shall be elected annually by
the Board of Directors at the first meeting of the Board of Directors held after
each annual meeting of the shareholders. If the election of officers shall not
be held in such meeting, such election shall be held as soon thereafter as
conveniently may be. No officer shall be elected for a term in excess of one (1)
year. Subject to the foregoing, each officer shall hold office until his
successor shall have been duly elected and shall have qualified or until his
death or until he shall resign or shall have been removed in the manner
hereinafter provided.
Section c. Removal. Any officer or agent elected or appointed
by the Board of Directors may be removed by the Board of Directors whenever in
its judgment the best interests of the corporation would be served thereby, but
such removal shall be without prejudice to the contract rights, if any, of the
person so removed.
Section d. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or other wise, may be filled by the Board
of Directors for the unexpired portion of the term.
Section e. Chairman of the Board. The Chairman shall, when
present, preside at all meetings of the shareholders and of the Board of
Directors and in general shall perform all duties incident to the office of
Chairman and such other duties as may be prescribed by the Board of Directors
from time to time.
Section f. The President. The President shall be subject to the
control of the Board of Directors and shall in general supervise and control all
of the business and affairs of the corporation. He shall, in the absence of the
Chairman, preside at all meetings of the shareholders and of the Board of
Directors. He may sign, with the Secretary or any other proper officer of the
corporation thereunto authorized by the Board of Directors, certificates for
shares of the corporation, any deed, mortgages, bonds, contracts, or other
instruments which the Board of Directors has authorized to be executed, except
in cases where the signing and execution thereof shall be expressly delegated by
the Board of Directors or by these bylaws to some other officer or agent of the
corporation, or shall be required by law to be otherwise signed or executed; and
in general shall perform all duties incident to the office of President and such
other duties as may be prescribed by the Board of Directors from time to time.
Section g. The Secretary. The Secretary shall: (a) keep the
minutes of the shareholders' and of the Board of Directors' meetings in one or
more books provided for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these bylaws or as required by law; (c) be
custodian of the corporate records and of the seal (if any) of the corporation
and see that said seal is affixed to all documents, the execution of which on
behalf of the corporation under its seal is duly authorized; (d) keep a register
of the post office address of each shareholder
D-10
<PAGE> 186
which shall be furnished to the Secretary by such shareholder; (e) sign with the
President certificates for shares of the corporation, the issuance of which
shall have been authorized by resolution of the Board of Directors; (f) have
general charge of the stock transfer books of the corporation; and (g) in
general perform all duties as from time to time may be assigned to him by the
President or by the Board of Directors.
Section h. The Treasurer. If required by the Board of Directors,
the Treasurer shall give a bond for the faithful discharge of his duties in such
sum and with such surety or sureties as the Board of Directors shall determine.
He or she shall: (a) have charge and custody of and be responsible for all funds
and securities of the corporation; receive and give receipts for moneys due and
payable to the corporation from any source whatsoever, and deposit all such
moneys in the name of the corporation in such banks, trust companies or other
depositories as shall be selected in accordance with the provisions of Article
VI of these bylaws; and (b) in general perform all of the duties incident to the
office of Treasurer and such other duties as from time to time may be assigned
to him by the President or by the Board of Directors.
Section i. Registered Agent. The Board of Directors may appoint
a Registered Agent for the corporation in accordance with the Tennessee Business
Corporation Act and may pay the agent such compensation from time to time as it
may deem appropriate.
ARTICLE 6.
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section a. Contracts. The Board of Directors may authorize any
officer or officers, agent or agents, to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
Section b. Loans. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors approved by a majority of
the Board of Directors. Such authority may be general or confined to specific
instances.
Section c. Checks, Drafts, Etc. All checks, drafts, or other
orders for the payment of money, notes or other evidences of indebtedness issued
in the name of the corporation, shall be signed by such officer or officers,
agent or agents of the corporation and in such manner as shall from time to time
be determined by resolution of the Board of Directors.
Section d. Deposits. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the corporation
in such banks, trust companies or other depositories as the Board of Directors
may select.
ARTICLE 7.
SHARES OF STOCK
Section a. Certificates for Shares. Certificates representing
shares of the corporation shall be in such form as shall be determined by the
Board of Directors. Such certificates shall be signed by the President and by
the Secretary or any Vice President. All certificates for shares shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the shares represented thereby are issued, with the number of
shares and date of issue, shall be entered on the stock transfer books of the
corporation. All certificates surrendered to the corporation for transfer shall
be cancelled and no new certificate shall be issued until the former certificate
for a like number of shares shall have been surrendered and cancelled, except
that in case of a lost, destroyed or mutilated certificate a new one may be
issued therefor upon such terms and indemnity to the corporation as the Board of
Directors may prescribe.
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<PAGE> 187
Section b. Transfer of Shares. Shares of stock may be
transferred by delivery of the certificate accompanied either by an assignment
in writing on the back of the certificate or by a written power of attorney to
sell, assign and transfer the same on the books of the corporation, signed by
the person appearing by the certificate to be the owner of the shares
represented thereby, and shall be transferable on the books of the corporation
upon surrender thereof so assigned or endorsed. The person registered on the
books of the corporation as the owner of any shares of stock shall be entitled
to all the rights of ownership with respect to such shares. It shall be the duty
of every shareholder to notify the corporation of his post office address.
ARTICLE 8.
DIVIDENDS
The Board of Directors may from time to time declare, and the
corporation may pay dividends on its outstanding shares in the manner and upon
the terms and conditions provided by the Tennessee Business Corporation Act and
by its articles of incorporation.
ARTICLE 9.
FISCAL YEAR
The books of the corporation shall be on a calendar year basis and
shall begin on the 1st day of January and end on the 31st day of December of
each year.
ARTICLE 10.
SEAL
This corporation may or may not have a seal and in any event the
failure to affix a corporate seal to any instrument executed by the corporation
shall not affect the validity thereof. If a seal is adopted, the seal of this
corporation shall include the following letters cut or engraved thereon:
CORNERSTONE BANCSHARES, INC.
ARTICLE 11.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND EMPLOYEES
The corporation shall indemnify every officer, director or employee,
his heirs, executors and administrators against judgments resulting from and
expenses reasonably incurred by him in connection with any action to which he
may be made a party by reason of his being an officer, director or employee of
the corporation, including any action based upon any alleged act or omission on
his/her part as an officer, director or employee of the corporation, except in
relation to matters as to which he shall be finally adjudged in such action to
be liable for his negligence or his/her misconduct, and except that in the event
of a settlement, indemnification shall be provided only in connection with such
matters covered by the settlement as to which the corporation is advised by
counsel that in the opinion of counsel the person to be indemnified was not
liable for such negligence or misconduct. The foregoing right of indemnification
shall not be exclusive of other rights to which such officers, directors or
employees may be entitled.
ARTICLE 12.
AMENDMENTS
The bylaws of this corporation may be altered, amended or repealed and
new bylaws may be adopted at any meeting of the Board of Directors of the
corporation by a majority vote of the directors present at the meeting or at any
meeting of the shareholders by a majority vote of the common stock represented
thereat.
D-12
<PAGE> 188
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Tennessee Code Annotated Sections 48-18-501 through 48-18-509
authorize a corporation to provide for the indemnification of officers,
directors, employees and agents in terms sufficiently broad to permit
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended. East Ridge has adopted the provisions of the Tennessee statute
pursuant to Article XXIV of its Bylaws.
Tennessee Code Annotated, Section 48-12-102, permits the inclusion in
the charter of a Tennessee corporation of a provision, with certain exceptions,
eliminating the personal monetary liability of directors to the corporation or
its shareholders for breach of the duty of care. East Ridge has adopted the
provisions of the statute in paragraph Ninth of its charter.
Item 21. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
(a) Exhibits
Number Description
------ -----------
<S> <C>
2 Agreement and Plan of Merger and Amendments (included as Appendix "A" to the Joint Proxy
Statement/Prospectus)
*3(a) Articles of Incorporation of East Ridge
*3(b) Bylaws of East Ridge, as amended
*4(a) Form of Common Stock Certificate
*5 Opinion Regarding Legality
8 Opinion Regarding Tax Matters
*10(a) Form of Consulting Agreement by and between David E. Young and Cornerstone Bancshares,
Inc.
10(b) Change-in-Control Protective Agreement and Form of Amendment (David E. Young)
*10(c) Executive Salary Continuation Agreement by and between David E. Young and The Bank of
East Ridge
10(d) Change-in-Control Protective Agreement (James D. Renegar)
*10(e) Executive Salary Continuation Agreement by and between James D. Renegar and The Bank of
East Ridge
10(f) Change-in-Control Protective Agreement (James R. Young, Jr.)
*10(g) Executive Salary Continuation Agreement by and between James R. Young and The Bank of East Ridge
10(h) Change-in-Control Protective Agreement (Daniel Crye)
10(i) Survivor Income Agreement (Daniel Crye)
24(a) Consent of Joseph Decosimo and Company, LLP
24(b) Consent of Hazlett, Lewis & Bieter, PLLC
*24(c) Consent of Mercer Capital Management, Inc.
24(d) Consents of Baker, Donelson, Bearman & Caldwell included in Exhibits 5 and 8
28(a) Form of Opinion of Mercer Capital Management, Inc. (included as Appendix "B" to the Joint Proxy
Statement/Prospectus)
*28(b) Form of Proxy for Annual Meeting of Shareholders of East Ridge
*28(c) Form of Proxy for Annual Meeting of Shareholders of Cornerstone
</TABLE>
- --------------------
* Previously filed.
<PAGE> 189
(b) Financial Statement Schedules--Not applicable
(c) Not Applicable
Item 22. Undertakings
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant for expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales of the
securities are being made, a post-effective amendment to this Registration
Statement:
(i) to include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect any facts or events arising after the effective
date (or most recent post-effective amendment) which,
individually, or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed or any material
change to such information set forth in the Registration
Statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3, Form S-8, and the
information required [or] to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(c) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this Registration Statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such
<PAGE> 190
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form.
(e) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (d) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(f) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the Proxy
Statement-Prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the request.
(g) The undersigned Registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
<PAGE> 191
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 3 to its Registration Statement
on Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Chattanooga, State of Tennessee on July 31, 1997.
EAST RIDGE BANCSHARES, INC.
By: James D. Renegar, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME POSITION DATE
<S> <C> <C>
James D. Renegar Principal executive officer and July 31, 1997
director
Ann Calhoun Principal accounting officer July 31, 1997
*James L. Eidson, Sr Director July 31, 1997
*Jason D. Helton, Jr Director July 31, 1997
*William B. Luther Director July 31, 1997
*David E. Young Director July 31, 1997
</TABLE>
*By James D. Renegar
Attorney-in-Fact
<PAGE> 192
Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
(a) Exhibits
Number Description
------ -----------
<S> <C>
2 Agreement and Plan of Merger and Amendments (included as Appendix "A" to the Joint Proxy
Statement/Prospectus)
*3(a) Articles of Incorporation of East Ridge, as amended
*3(b) Bylaws of East Ridge, as amended
*4 Form of Common Stock Certificate
*5 Opinion Regarding Legality
*8 Opinion Regarding Tax Matters
*10(a) Form of Consulting Agreement by and between David E. Young and Cornerstone Bancshares,
Inc.
*10(b) Change-in-Control Protective Agreement and Form of Amendment (David E. Young)
*10(c) Executive Salary Continuation Agreement by and between David E. Young and The Bank of
East Ridge
*10(d) Change-in-Control Protective Agreement (James D. Renegar)
*10(e) Executive Salary Continuation Agreement by and between James D. Renegar and The Bank of
*10(f) Change-in-Control Protective Agreement (James R. Young, Jr.)
*10(g) Executive Salary Continuation Agreement by and between James R. Young and The Bank of East Ridge
*10(h) Change-in-Control Protective Agreement (Daniel Crye)
*10(i) Survivor Income Agreement (Daniel Crye)
24(a) Consent of Joseph Decosimo and Company, LLP
24(b) Consent of Hazlett, Lewis & Bieter, PLLC
*24(c) Consent of Mercer Capital Management, Inc.
*24(d) Consents of Baker, Donelson, Bearman & Caldwell included in Exhibits 5 and 8
28(a) Form of Opinion of Mercer Capital Management, Inc. (included as Appendix "B" to the Joint Proxy
Statement/Prospectus)
*28(b) Form of Proxy for Annual Meeting of Shareholders of East Ridge
*28(c) Form of Proxy for Annual Meeting of Shareholders of Cornerstone
</TABLE>
* Previously filed.
<PAGE> 1
EXHIBIT 24(a)
Consent of Independent Public Accountants
We hereby consent to the inclusion in this Registration Statement on
Form S-4 of our report dated February 10, 1997, with respect to the
consolidated financial statements of East Ridge Bancshares, Inc. and Subsidiary
included in the Registration Statement. We also consent to the reference to
our firm under the caption "Experts."
Joseph Decosimo and Company, LLP
Chattanooga, Tennessee
July 31, 1997
<PAGE> 1
EXHIBIT 24(b)
Consent of Independent Public Accountants
We hereby consent to the inclusion in this Registration Statement on
Form S-4 of our report dated February 13, 1997, with respect to the financial
statements of Cornerstone Community Bank included in the Registration
Statement. We also consent to the reference to
our firm under the caption "Experts."
Hazlett, Lewis & Bieter, PLLC
Chattanooga, Tennessee
July 31, 1997
